<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-Q

                                   ----------

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

                  For the quarterly period ended March 31, 2002

                                       or

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

                       For the transition period from      to
                                                      -----    -----

                        Commission File Number: 001-15899

                              PURE RESOURCES, INC.
             (Exact name of Registrant as specified in its charter)

          Delaware                                               74-2952918
(State or other jurisdiction                                  (I.R.S. Employer
     of incorporation or                                     Identification No.)
       organization)

           500 West Illinois
             Midland, Texas                                        79701
(Address of principal executive offices)                         (Zip Code)

                                 (915) 498-8600
              (Registrant's telephone number, including area code)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[_].

     As of May 7, 2002, 50,256,141 shares of common stock, par value $.01 per
share of Pure Resources, Inc. were outstanding.

================================================================================

<PAGE>


                                TABLE OF CONTENTS
                                -----------------

<TABLE>
<S>                                                                                                       <C>
Forward Looking Information and Risk Factors...........................................................   1

                                         PART I -- FINANCIAL INFORMATION

Item 1.      Financial Statements
             --------------------

             Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and
                   December 31, 2001...................................................................   2
             Unaudited Consolidated Statements of Operations
                   for the Three Months Ended March 31, 2002 and 2001..................................   4
             Unaudited Consolidated Statements of Cash Flows
                   for the Three Months Ended March 31, 2002 and 2001..................................   5
             Notes to Consolidated Financial Statements................................................   6

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations.....  30
             -------------------------------------------------------------------------------------

Item 3.      Quantitative and Qualitative Disclosures About Market Risk................................  44
             ----------------------------------------------------------

                                           PART II -- OTHER INFORMATION

Item 1.      Legal Proceedings.........................................................................  48
             -----------------

Item 2.      Changes in Securities and Use of Proceeds.................................................  48
             -----------------------------------------

Item 4.      Submission of Matters to a Vote of Security Holders.......................................  48
             ---------------------------------------------------

Item 6.      Exhibits and Reports on Form 8-K..........................................................  48
             --------------------------------

             Signatures................................................................................  49
</TABLE>

<PAGE>


                              PURE RESOURCES, INC.

                  FORWARD LOOKING INFORMATION AND RISK FACTORS

          Pure Resources, Inc. ("Pure") or its representatives may make forward
looking statements, oral or written, including statements in this report's
Management's Discussion and Analysis of Financial Condition and Results of
Operations, press releases and filings with the Securities and Exchange
Commission, regarding estimated future net revenues from oil and natural gas
reserves and the present value thereof, planned capital expenditures (including
the amount and nature thereof), increases in oil and gas production, the number
of exploratory and development wells Pure anticipates drilling through 2002,
potential reserves and Pure's financial position, business strategy and other
plans and objectives for future operations. Although Pure believes that the
expectations reflected in these forward looking statements are reasonable, there
can be no assurance that the actual results or developments anticipated by Pure
will be realized or, even if substantially realized, that they will have the
expected effects on its business or operations. Among the factors that could
cause actual results to differ materially from Pure's expectations are general
economic conditions, inherent uncertainties in interpreting engineering data,
operating hazards, delays or cancellations of drilling operations for a variety
of reasons, competition, fluctuations in oil and gas prices, government
regulations and other factors set forth in Pure's 2001 Annual Report filed on
Form 10-K and other SEC filings. All subsequent oral and written forward looking
statements attributable to Pure or persons acting on its behalf are expressly
qualified in their entirety by these factors. Pure assumes no obligation to
update any of these statements.

                                       1

<PAGE>


                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                              Pure Resources, Inc.

                           Consolidated Balance Sheets
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                  March 31,    December 31,
                                                                                    2002           2001
                                                                                 -----------   ------------
                                                                                 (Unaudited)
<S>                                                                               <C>           <C>
                                    ASSETS

Current assets:
    Cash and cash equivalents                                                     $    3,879    $    5,593
    Accounts receivable:
       Oil and gas                                                                    51,364        54,946
       Other                                                                           7,728        11,227
    Fair value of derivatives (Note 8)                                                    --         4,918
    Prepaid expenses and other current assets                                          3,727         1,761
                                                                                  ----------    ----------
           Total current assets                                                       66,698        78,445
                                                                                  ----------    ----------

Property, plant and equipment, at cost:
    Oil and gas properties, using the successful efforts method of accounting:
       Proved properties                                                           1,974,693     1,957,723
       Unproved properties                                                            67,138        64,051
    Accumulated depletion, depreciation and amortization                            (747,874)     (714,415)
                                                                                  ----------    ----------
                                                                                   1,293,957     1,307,359
                                                                                  ----------    ----------

Other property and equipment, net                                                     15,101        16,629

Deferred compensation (Note 4)                                                        17,101        14,982

Receivables for under-delivered gas                                                    5,584         5,853

Other assets, net                                                                     11,128        11,540
                                                                                  ----------    ----------
                                                                                  $1,409,569    $1,434,808
                                                                                  ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       2

<PAGE>

                              Pure Resources, Inc.

                           Consolidated Balance Sheets
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                               March 31,    December 31,
                                                                                  2002          2001
                                                                              -----------   ------------
                                                                              (Unaudited)
<S>                                                                            <C>           <C>
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable and accrued liabilities:
       Trade                                                                   $   62,502    $   60,713
       Fair value of derivatives and deferred commodity hedges (Note 8)             2,934           620
       Other (Note 9)                                                              52,840        52,518
                                                                               ----------    ----------
           Total current liabilities                                              118,276       113,851
                                                                               ----------    ----------

Long-term debt                                                                    561,569       586,703

Liabilities for over-delivered gas                                                 12,949        11,325

Accrued abandonment, restoration and environmental liabilities                     23,567        22,611

Fair value of derivatives (Note 8)                                                    571           721

Deferred income taxes                                                             131,766       135,269

Common stock subject to repurchase (Note 4)                                        69,224        69,800

Minority interest                                                                   6,608         6,445

Stockholders' equity:
    Preferred stock, $.01 par value, 10,000,000 shares authorized; none
       issued and outstanding                                                          --            --
    Common stock, $.01 par value, 200,000,000 shares authorized; 50,206,347
       and 50,175,777 shares issued and outstanding at March 31, 2002
       and December 31, 2001, respectively                                            502           502
    Additional paid-in capital                                                    356,516       345,310
    Notes receivable - affiliates                                                  (7,573)       (7,377)
    Deferred compensation (Note 4)                                                 (1,360)       (1,517)
    Accumulated other comprehensive income                                          3,229        10,098
    Retained earnings                                                             133,725       141,067
                                                                               ----------    ----------
           Total stockholders' equity                                             485,039       488,083
                                                                               ----------    ----------

    Commitments and contingencies (Note 4)
                                                                               $1,409,569    $1,434,808
                                                                               ==========    ==========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3

<PAGE>

                              Pure Resources, Inc.

                 Unaudited Consolidated Statements of Operations
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                     Three Months Ended March 31,
                                                                                     ----------------------------
                                                                                           2002        2001
                                                                                         --------    --------
<S>                                                                                      <C>         <C>
Revenues:
    Oil sales                                                                            $ 38,191    $ 47,786
    Gas sales                                                                              49,214      76,870
    Other operating                                                                           858          --
    Gain on sale of assets                                                                    137          22
                                                                                         --------    --------
            Total revenues                                                                 88,400     124,678
                                                                                         --------    --------

Expenses:
    Oil and gas production                                                                 20,681      15,703
    Production and other taxes                                                              8,192       9,226
    General and administrative                                                              6,097       6,186
    Amortization of deferred compensation (general and administrative)                      8,266      12,693
    Exploration and abandonment (Note 10)                                                   8,090       3,339
    Depletion, depreciation and amortization                                               38,522      24,003
                                                                                         --------    --------
            Total expenses                                                                 89,848      71,150
                                                                                         --------    --------
            Operating income (loss)                                                        (1,448)     53,528
                                                                                         --------    --------

Other income (expense):
    Interest income                                                                           499         197
    Interest expense                                                                       (8,449)     (4,050)
    Other                                                                                  (1,180)      1,151
                                                                                         --------    --------

            Income (loss) before income taxes and minority interest                       (10,578)     50,826

Income tax benefit (expense)                                                                2,781     (17,786)

Minority interest                                                                            (163)       (159)
                                                                                         --------    --------
            Income (loss) from continuing operations                                       (7,960)     32,881
                                                                                         --------    --------

Discontinued operations, net of tax (Note 12):
    Income from operations                                                                    181         535
    Gain on disposal                                                                          436          --
                                                                                         --------    --------
            Income from discontinued operations                                               617         535
                                                                                         --------    --------
            Net income (loss)                                                            $ (7,343)   $ 33,416
                                                                                         ========    ========

            Income (loss) per share from continuing operations - basic                   $  (0.16)   $   0.66
                                                                                         ========    ========

            Net income (loss) per share - basic                                          $  (0.15)   $   0.67
                                                                                         ========    ========

            Income (loss) per share from continuing operations - assuming dilution       $  (0.16)   $   0.64
                                                                                         ========    ========

            Net income (loss) per share - assuming dilution                              $  (0.15)   $   0.65
                                                                                         ========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4

<PAGE>

                              Pure Resources, Inc.

                 Unaudited Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                        Three Months Ended March 31,
                                                                        ----------------------------
                                                                             2002         2001
                                                                           --------    ---------
<S>                                                                        <C>         <C>
Cash flows from operating activities:
    Net income (loss)                                                      $ (7,343)   $  33,416
    Adjustment to reconcile net income (loss) to net cash provided by
      operating activities:
        Depletion, depreciation and amortization                             38,522       24,003
        Amortization of deferred compensation                                 8,266       12,693
        Amortization of deferred commodity hedges                                --       (4,227)
        Non-cash effect of derivatives                                       (3,485)      (1,200)
        Exploration and abandonments                                          3,691        1,353
        Gain on sale of assets                                                 (137)         (22)
        Deferred income taxes                                                  (137)       4,360
        Non-cash effect of discontinued operations, net                          98          597
        Other items                                                              31          497
    Changes in assets and liabilities, excluding acquisitions:
        Accounts receivable                                                   7,082       (2,124)
        Prepaid expenses and other current assets                            (1,966)        (699)
        Receivables for under-delivered gas                                     269        1,309
        Other assets                                                           (469)        (151)
        Accounts payable and accrued liabilities                             11,564       (1,471)
        Income taxes payable                                                    857       10,429
        Liabilities for over-delivered gas                                    1,623       (1,014)
                                                                           --------    ---------
              Total adjustments                                              65,809       44,333
                                                                           --------    ---------
              Net cash provided by operating activities                      58,466       77,749
                                                                           --------    ---------

Cash flows from investing activities:
    Investment in oil and gas properties                                    (59,438)    (315,529)
    Additions to other property and equipment                                (1,512)      (1,130)
    Proceeds from sale of assets                                              3,150          551
    Proceeds from sale of assets - discontinued operations                   22,450           --
                                                                           --------    ---------
              Net cash used in investing activities                         (35,350)    (316,108)
                                                                           --------    ---------

Cash flows from financing activities:
    Proceeds from  (payments of) revolving debt, net                        (25,200)     239,856
    Exercise of stock options                                                   393           48
    Other financing activities                                                  (23)       5,000
                                                                           --------    ---------
              Net cash provided by (used in) financing activities           (24,830)     244,904
                                                                           --------    ---------

              Net increase (decrease) in cash and cash equivalents           (1,714)       6,545

Cash and cash equivalents, beginning of period                                5,593        3,325
                                                                           --------    ---------
Cash and cash equivalents, end of period                                   $  3,879    $   9,870
                                                                           ========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       5

<PAGE>

                              PURE RESOURCES, INC.
                   Notes to Consolidated Financial Statements
                             March 31, 2002 and 2001
                                   (Unaudited)

(1)       Organization, Nature of Operations and Basis of Presentation

          Organization

          Pure Resources, Inc. ("Pure"), a Delaware corporation, was, until May
25, 2000, a wholly-owned subsidiary of Union Oil Company of California ("Union
Oil"). Pure was formed in December 1999 in connection with the Agreement and
Plan of Merger (the "Merger Agreement") dated December 13, 1999, as amended, by
and among Union Oil, Pure, TRH, Inc. and Titan Exploration, Inc. ("Titan").
Subsequent to the merger with Titan and at the present, Union Oil owns
32,709,067 shares of Pure's common stock, which is approximately 65% of Pure's
outstanding shares at March 31, 2002.

          Nature of Operations

          Pure is an independent energy company. Pure is engaged in the
exploration, development and production of oil and natural gas primarily in the
Permian Basin of west Texas and southeastern New Mexico, the San Juan Basin
areas of New Mexico and Colorado, offshore in the Gulf of Mexico and the Gulf
Coast region covering Texas, Louisiana, Arkansas, Mississippi, Alabama and
Florida.

          Other

          In the opinion of management, the unaudited consolidated financial
statements of Pure as of March 31, 2002 and for the three months ended March 31,
2002 and 2001 include the adjustments and accruals which are necessary for a
fair presentation of the results for the interim periods. These interim results
are not necessarily indicative of results for a full year.

          Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q pursuant
to the rules and regulations of the Securities and Exchange Commission. These
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in Pure's 2001 Annual Report
filed on Form 10-K.

          Preparation of the accompanying unaudited consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Oil and gas reserve estimates
are used in the calculation of depletion expense and in the determination of
impairment of oil and gas properties and are inherently imprecise. Actual
results could differ from those estimates.

          Reclassifications

          Certain reclassifications have been made to the 2001 amounts to
conform to the 2002 presentation.

          Recently Issued or Adopted Accounting Pronouncements

          In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets". SFAS No. 141
requires that all business combinations initiated after June 30, 2001, be
accounted for under the purchase method and SFAS No. 142 requires that goodwill
no longer be amortized to earnings, but instead be reviewed for impairment.
There is no impact to Pure's financial statements as we have not entered into
any business combinations subsequent to June 30, 2001 that required the
recording of goodwill or other intangible assets.

          In October 2001, FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" which establishes requirements for accounting for
removal-type costs associated with asset retirements. The standard is

                                       6

<PAGE>

effective for years beginning after June 15, 2002, with earlier application
encouraged. As of March 31, 2002, Pure is assessing the impact on its financial
statements.

          In October 2001, FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 superseded SFAS No. 121 and the accounting and reporting provisions
of APB Opinion No. 30. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. Pure adopted the SFAS No. 144 on January 1, 2002. Pure
believes that the impact from SFAS No. 144 on Pure's financial position and
results of operations should not be significantly different from that of SFAS
No. 121, except as to the reporting of asset disposals related to discontinued
operations.

(2)       Acquisitions

          Hallwood  Merger

          On March 30, 2001, Pure and Hallwood Energy Corporation ("Hallwood")
announced the signing of a definitive merger agreement pursuant to which Pure
Resources II, Inc., an indirect wholly-owned subsidiary of Pure, would seek to
acquire all the outstanding shares of common stock of Hallwood at a price of
$12.50 per share and all the outstanding shares of Series A Cumulative Preferred
Stock of Hallwood at a price of $10.84 per share. The all-cash transaction was
structured as a first step tender offer followed by a cash merger to acquire all
remaining shares of Hallwood.

          On May 8, 2001, Pure accepted for payment approximately 85% of the
common stock and 78% of the preferred stock of Hallwood. On May 30, 2001, after
completion of a subsequent tender offer period, Pure completed the acquisition
of the remaining common and preferred shares through consummation of the cash
merger. The results of operations of Hallwood have been included in Pure's since
May 1, 2001.

          The preliminary purchase price (the final purchase price and related
allocation is not expected to differ materially from the preliminary purchase
price and related allocation) is calculated as follows (in thousands):

Hallwood common and preferred stock             $145,286
Hallwood stock options and warrants                5,684
Assumed debt (subsequently refinanced)            87,436
Other obligations assumed                         10,449
Severance and non-compete payments                20,390
Estimated acquisition and other related costs      6,384
                                                --------

Purchase price                                  $275,629
                                                ========

          The acquisition, accounted for on the purchase method, resulted in the
following noncash investing activities (in thousands):

Recorded amount of assets acquired        $372,676
Assumed debt                               (87,436)
Deferred income taxes                      (37,736)
Liabilities assumed                        (74,534)
                                          --------

Acquisition costs, net of cash acquired   $172,970
                                          ========

          The liabilities assumed include amounts related to preacquisition
contingencies and fair value of financial derivatives of $31.2 million.

                                       7

<PAGE>

          International Paper Transaction

          On January 31, 2001, Pure (a) acquired oil and gas properties, fee
mineral and royalty interests from International Paper Company and (b)
contributed cash for a controlling general and limited partnership interests, in
a partnership that owns oil and gas properties contributed by International
Paper, for a total of approximately $261 million, subject to adjustments which
totaled $5.0 million, for cash (collectively "International Paper transaction").
In addition, Pure incurred approximately $5.1 million in transaction costs
associated with the International Paper transaction. Affiliates of International
Paper own an approximate 5% interest in the partnership, which holds certain of
the oil and gas properties, involved in this transaction. The transaction was
funded under Pure's credit facilities. Pure accounted for this transaction on
the purchase method and allocated the transaction value as follows (in
thousands):

Partnership interests (consolidated in oil and gas properties
   in the balance sheet)                                        $243,221
Oil and gas properties and other assets                           23,703
                                                                --------

Cash paid                                                       $266,924
                                                                ========

          Pure also acquired over 6 million gross (3.2 million net) acres of fee
mineral ownership, primarily across the southern Gulf Coast region of the United
States (which are included in oil and gas properties above).

          Pro Forma Results of Operations (Unaudited)

          The following table reflects the pro forma results of operations for
the three months ended March 31, 2001 as though (a) the International Paper
transaction and (b) the Hallwood merger each occurred as of January 1, 2001. The
pro forma amounts are not necessarily indicative of the results that may be
reported in the future (in thousands, except per share data).

                                                    2001
                                                  --------

Revenues                                          $166,696
Net income                                        $ 42,085
Net income per common share - basic               $   0.83
Net income per common share - assuming dilution   $   0.81

                                       8

<PAGE>

(3)       Debt

                                March 31,   December 31,
                                 2002          2001
                                ---------   ------------
                                     (in thousands)

5-Year Revolver                  $ 56,500     $ 58,000
3-Year Revolver                   157,500      175,000
Working Capital Revolver               --        6,200
7.125% Senior Notes, Due 2011     350,000      350,000
Senior Notes discount              (2,431)      (2,497)
                                 --------     ---------
                                 $561,569     $586,703
                                 ========     =========

          5-Year Revolver

          In September 2000, Pure entered into an unsecured credit agreement for
a $250 million five-year revolving credit facility ("5-Year Revolver") with
JPMorgan Chase Bank (the "Bank") and First Union National Bank. The 5-Year
Revolver has current commitments of $235 million. All amounts outstanding on the
5-Year Revolver are due and payable in full on September 29, 2005. A portion of
the 5-Year Revolver is available for the issuance of up to $50 million of
letters of credit.

          At Pure's option, borrowings under the 5-Year Revolver bear interest
at either (a) the "Alternative Base Rate" (i.e. the higher of the Bank's prime
rate, or the federal funds rate plus .50% per annum), or (b) the Eurodollar rate
plus a margin ranging from .80% to .95% per annum for the 5-Year Revolver. These
margins increase as Pure's debt coverage ratio decreases. Participation fees on
letters of credit are due quarterly and range from .925% to 1.075% per annum of
the outstanding amount of letters of credit. Facility fees are due quarterly on
the total of the outstanding commitments under the 5-Year Revolver and range
from .20% to .30% per annum. At March 31, 2002, Pure is paying .80% margin on
its Eurodollar tranches.

          The 5-Year Revolver contains various restrictive covenants and
compliance requirements, which include (a) limiting the incurrence of additional
indebtedness, (b) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the lenders' consent, (c) limitation on
dividends and distributions, (d) other financial covenants and (e) limitation on
hedging arrangements.

          3-Year Revolver

          In November 2001, Pure entered into an unsecured credit agreement with
JPMorgan Chase, First Union National Bank and BNP Paribas for a $275 million
3-year revolving credit facility ("3-Year Revolver"). All amounts outstanding
under the 3-Year Revolver are due and payable in full on November 20, 2004. A
portion of the 3-Year Revolver is available for the issuance of up to $50
million of letters of credit.

          At Pure's option, borrowings under the 3-Year Revolver bear interest
at either (a) the "Alternate Base Rate" (i.e. higher of the Bank's prime rate,
or the federal funds rate plus .50% per annum) or (b) the Eurodollar rate plus a
margin ranging from .375% to .950% per annum. These margins vary as Pure's debt
rating with, both, S&P and Moody's changes (i.e. improvement in Pure's debt
rating decreases its margins). At March 31, 2002, Pure is paying .750% margin on
its Eurodollar tranches.

          Participation fees on letters of credit are due quarterly and range
from .500% to .750% per annum on the outstanding amount of letters of credit.
Facility fees are due quarterly on the total of the outstanding commitments
under the 3-Year Revolver and range from .125% to .300% per annum. Utilization
fees of .25% are due quarterly on the outstanding principal and letters of
credit for the periods when the lender's exposure exceeds 33% of the total
commitment.

                                       9

<PAGE>

          The 3-Year Revolver contains various restrictive covenants and
compliance requirements, which include (a) limiting the incurrence of additional
indebtedness, (b) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the lenders' consent, (c) limitation on
dividends and distributions, (d) other financial covenants and (e) limitation on
hedging arrangements.

          Working Capital Revolver

          In October 2000, for purposes of maximizing its daily cash management
activity, Pure entered into an unsecured $10 million working capital credit
facility (the "Working Capital Revolver") with the Bank. Individual borrowings
may be made for up to a three week period. The Working Capital Revolver has no
maturity date and is cancelable at anytime by the Bank. The interest rate of
each loan under the Working Capital Revolver is determined by agreement between
Pure and the Bank, which at March 31, 2002 was 3.75%. The rate shall not exceed
the maximum interest rate permitted under applicable law. Interest rates
generally are at the Bank's cost of funds plus 1% per annum. Pure has the
ability and intent to finance the principal outstanding under the Working
Capital Revolver utilizing Pure's 5-Year Revolver or 3-Year Revolver.

          7.125% Senior Notes

          In June 2001, Pure issued $350 million in unsecured senior notes which
bear interest at 7.125% ("7.125% senior notes"). The 7.125% senior notes were
issued at a discount to their face value which resulted in the 7.125% senior
notes having a yield of 7.232%. The 7.125% senior notes pay interest each June
15 and December 15 beginning in December 2001. The maturity date of the 7.125%
senior notes is June 15, 2011. Pure has the right to redeem the 7.125% senior
notes at any time for an amount equal to the principal plus a make-whole
premium.

          The 7.125% senior notes are fully and unconditionally guaranteed, on a
joint and several basis, by certain wholly-owned subsidiaries of Pure. Each of
the guarantees is an unsecured obligation of the guarantor and ranks pari passu
with the guarantees provided by and the obligations of such guarantor
subsidiaries under the 5-Year Revolver and 3-Year Revolver and with all existing
and future unsecured indebtedness of such guarantor for borrowed money that is
not, by its terms, expressly subordinated in right of payment to such guarantee.

          The 7.125% senior notes indenture contains covenants, which include
limitations on (a) liens, (b) sale/leaseback transactions and (c) mergers and
consolidations. Pursuant to a registration rights agreement, in November 2001
Pure completed an exchange offer pursuant to which the 7.125% senior notes were
exchanged for a new, registered issue of 7.125% senior notes.

          Maturities of debt are as follows (in thousands):

      2002     $     --
      2003           --
      2004      157,500
      2005       56,500
      2006           --
Thereafter      350,000

                                       10

<PAGE>

(4)       Commitments and Contingenc

          General

          Pure is subject to contingent liabilities with respect to existing or
potential claims, lawsuits and other proceedings, including those involving
environmental, tax and other matters, certain of which are discussed more
specifically below. Pure accrues liabilities when it is probable that future
costs will be incurred and such costs can be reasonably estimated. Such accruals
are based on developments to date and Pure's estimates of the outcomes of these
matters and its experience in contesting, litigating and settling other matters.
As the scope of the liabilities becomes better defined, there will be changes in
the estimates of future costs, which management, currently, believes will not
have a material effect on Pure's results of operations and financial condition
or liquidity.

          Litigation

          Hallwood Petroleum, Inc. has been named as a defendant in a suit
styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al, which was
filed May 17, 2001 in the 15th Judicial District Court, Lafayette Parish,
Louisiana. Lamson Petroleum Corporation seeks proceeds from the sale of gas and
condensate produced and sold from units on 200 acres of land in the parish and a
declaratory judgement recognizing its interest in production from the units.
Hallwood Petroleum, Inc. and the other working interest owners in the leases
involved offered to settle the matter for $250,000 (approximately 50% of this
amount would be Pure's share). The settlement offer was not an admission of
liability but an attempt to limit the parties' future costs to vigorously defend
the matter. Lamson rejected this offer and countered with an offer to settle the
matter for $25 million. All parties rejected this offer.

          We are unable at this time to assess the likelihood of an unfavorable
outcome. We strongly believe the suit is without merit and will vigorously
defend against it. In our opinion, the ultimate disposition of this lawsuit in
the event of an unfavorable outcome, if the matter does go to trial, should not
have a material adverse effect on Pure's financial position or liquidity, but
could adversely impact results of operations in a given reporting period.

          Environmental matters

          Pure is subject to loss contingencies pursuant to federal, state and
local environmental laws and regulations. These include existing and possible
future obligations to investigate the effects of the release or disposal of
certain petroleum and chemical substances at various sites; to remediate or
restore these sites; to compensate others for damage to property and natural
resources, for remediation and restoration costs and for personal injuries; and
to pay civil penalties and, in some cases, criminal penalties and punitive
damages. These obligations relate to sites owned by Pure or others and are
associated with past and present operations.

          Liabilities are accrued when it is probable that future costs will be
incurred and such costs can be reasonably estimated. However, in many cases,
investigations are not yet at a stage where Pure is able to determine whether it
is liable or, even if liability is determined to be probable, to quantify the
liability or estimate a range of possible exposure. In such cases, the amounts
of Pure's liabilities are indeterminate due to the potentially large number of
claimants for any given site or exposure, the unknown magnitude of possible
contamination, the imprecise and conflicting engineering evaluations and
estimates of proper clean-up methods and costs, the unknown timing and extent of
the corrective actions that may be required, the uncertainty attendant to the
possible award of punitive damages, the recent judicial recognition of new
causes of action, or other reasons.

          As discussed in Note 5, Pure had accrued $4.4 million and $4.6 million
at March 31, 2002 and December 31, 2001, respectively, for estimated future
environmental assessment and remediation costs at various sites where
liabilities for such costs are probable.

                                       11

<PAGE>

          Employment/Severance Agreements

Put Right. Pursuant to the employment and/or severance and put right agreements
("employment/severance agreements") entered into between Pure and its officers,
under certain circumstances described below, each covered officer has the right
to require Pure to purchase ("put right"), at a price equal to the "net asset
value" per share, the shares of Pure common stock:

..    Received by the officer in the Titan merger in exchange for shares of Titan
     common stock held by the officer on December 1, 1999 (of which there were
     2,796,107 Pure shares held subject to the put right at March 31, 2002). At
     March 31, 2002, with the net asset value per share of $17.49, Pure's
     obligation to purchase this common stock was approximately $48.9 million.
..    Acquired by the officer pursuant to exercises of stock options currently
     held or granted in the future, (see Note 6 for the shares underlying the
     stock option subject to the put right at March 31, 2002 and the applicable
     exercise prices). At March 31, 2002, there were 4,130,584 stock options
     subject to the put right, of which 3,449,068 had exercise prices that were
     less than the net asset value per share of $17.49 at March 31, 2002. Pure
     would receive proceeds of approximately $40.0 million if the 3,449,068 of
     stock options were exercised and Pure's obligation to purchase the
     3,449,068 shares, at the net asset value per share of $17.49 at March 31,
     2002, was approximately $60.3 million. Accordingly, Pure's net obligation
     related to the stock options subject to the put right at March 31, 2002 was
     approximately $20.3 million.

          The put right is exercisable by the covered officer upon the
occurrence of a "put event" by providing written notice to Pure within 90 days
after the date of the put event. The date of that exercise notice establishes
the "put date" for purposes of making certain calculations to be utilized in the
closing of the related purchase of shares, or "put closing." If the officer
either does not exercise the put right in a situation other than in connection
with a change of control of Pure or Unocal, or exercises the put right with
respect to only a portion of the covered shares, the officer cannot later cause
Pure to purchase additional shares after another put event. A put event means
any one of the following:

..    Termination of the officer's employment for any reason after May 25, 2003
     (for example, as a result of voluntary resignation or termination for
     cause, as defined in the applicable agreement).
..    Termination of the officer's employment by Pure without cause, as defined
     in the applicable agreement.
..    Change of control, as defined in the applicable agreement, of Pure.
..    Change of control, as defined in the applicable agreement, of Unocal.
..    Death or disability of the officer.
..    Resignation of the officer for good reason, as defined in the applicable
     agreement and discussed below.
..    Acquisition by Union Oil and its affiliates of beneficial ownership of 85%
     or more of Pure's voting securities.

          If a put event occurs and one or more of the covered officers
exercises the put right, Pure will require cash to satisfy its obligation to
purchase the shares covered by the put exercise. Because the
employment/severance agreements provide the covered officer the right to include
in the amount of shares to be purchased by Pure any specified shares that are
acquired pursuant to stock option exercises after the put event or put date but
before the related put closing, Pure may receive cash from stock option
exercises in connection with exercises of the put right. If Pure does not have
enough cash, net of the amount received by Pure in related stock option
exercises, to satisfy its obligations, Pure would have to incur additional
indebtedness. At March 31, 2002, the net amount of required cash, assuming all
individuals subject to the put exercise their put right at the net asset value
per share of $17.49, is estimated to be $69.2 million (which is reflected in the
consolidated balance sheet as the amount of the common stock subject to
repurchase). At the end of the calendar quarters since the origination of the
employment/severance agreements containing the put right, the amount of the
common stock subject to repurchase has ranged from $69.2 million to $155.5
million, as calculated in accordance with the following paragraph. Accordingly,
it could require substantial financial resources of Pure to fund the put right.

          The net asset value per share is computed by dividing the net asset
value, as defined below, by the number of fully-diluted outstanding shares. The
net asset value is computed as 110% of the pre-tax present value (discounted at
10%) of Pure's proved reserves, utilizing the average of the three-year NYMEX
commodity strip price for the 120 days prior to the put date (adjusted for
commodity hedges in place at the put date), less the funded debt of Pure at the
put date. Funded debt was approximately $564 million at March 31, 2002. The
calculated

                                       12

<PAGE>

number of fully-diluted outstanding shares as the sum of (a) the total issued
and outstanding common shares of Pure at the put date and (b) the total number
of outstanding stock options (regardless of whether the options are in-the-money
or out-of-the-money) or other securities convertible into common stock as of the
put date (for both management and employees).

          For purposes of valuing the proved reserves, the board of directors of
Pure, in its sole discretion, will determine the proved reserves ("initial
valuation"). Messrs. Hightower and Staley have the right to request a second
valuation at their expense by a third party independent engineering firm
("second valuation"). If the second valuation is not acceptable to Pure, Pure
must select another third party independent engineering firm to perform a third
evaluation ("final valuation") and the cost of the final valuation will be
shared equally by Pure and the officer. If the final evaluation exceeds the
second valuation, the second valuation must be used to determine the net asset
value. If the initial valuation exceeds the final evaluation, the initial
valuation must be used to determine the net asset value. If the final evaluation
is between the initial valuation and the second valuation, an average of all
three evaluations must be used to determine the value of the proved reserves.

          At March 31, 2002, the net asset value per share (based on the data
above) was estimated to be $17.49 and Pure's common stock price closed at $22.58
per share.

          The $69.2 million reflected in the consolidated balance sheet at March
31, 2002 as common stock subject to repurchase is based on the net asset value
per share of $17.49 discussed above and has been calculated as (a) the amount
required to purchase all covered shares of common stock (including shares
underlying stock options) of all covered officers, less (b) the proceeds Pure
would receive from the exercise by all covered officers of all of their
in-the-money stock options (options whose exercise price is less than the net
asset value per share).

          The gross deferred compensation related to Pure's potential
obligations to purchase the covered shares (including shares underlying stock
options), which at March 31, 2002 was approximately $40.9 million, is calculated
as the sum of the following:

          (a)  the product of (x) the difference between the net asset value per
               share and Pure's common stock price (but only if the net asset
               value per share is higher), times (y) the total of the number of
               all covered officers' covered shares that were actually
               outstanding at March 31, 2002; plus

          (b)  the product of (x) the difference between the higher of the net
               asset value per share or Pure's common stock price and the
               exercise price of all covered officers' stock options with an
               exercise price that is less than the higher of net asset value
               per share or Pure's common stock price, times (y) the number of
               shares underlying these stock options

          In 2002, 2001 and 2000, Pure recorded approximately $8.1 million,
$915,000 and $14.8 million, respectively, in compensation expense related to
these compensation arrangements. The total deferred compensation periodically
determined will be amortized as compensation expense over a three-year period
for common stock held at May 26, 2000 (date of the Titan merger), and the
vesting period of each of the applicable stock option agreements. At March 31,
2002 the deferred compensation reflected in the consolidated balance sheet of
$17.1 million is computed by taking the gross deferred compensation of $40.9
million less the compensation expense recorded in 2002, 2001 and 2000, as noted
above. After May 26, 2003, any changes in gross deferred compensation, except
for stock options not fully vested, for each quarterly determination period will
be charged or credited to compensation expense in each quarterly determination
period.

          This compensation arrangement is being treated as a "variable plan"
under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations including FASB Interpretation No. 44
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25." As a result of this treatment, during the
three months ended March 31, 2002 additional paid-in capital was increased by
$10.8 million.

          At March 31, 2002, Pure recorded as common stock subject to repurchase
$69.2 million based on Pure's historical method of calculating this liability.
Due to interpretational factors and circumstances that could exist at the time
of the exercise of the put right, Pure estimates this put obligation would be
not less than $69.2 million nor more than $80.7 million at March 31, 2002. The
aforementioned interpretations and circumstances relate to the treatment and
application of the proceeds from the exercise of the stock options and to the
number of shares to be considered or utilized as fully-diluted shares.
Additionally, the common stock subject to repurchase could differ due

                                       13

<PAGE>

to (a) the imprecision associated with the engineering of oil and gas reserves
and (b) the multiple valuations of the proved reserves that could be required
under the put right, as discussed above.

Severance Benefits. Pursuant to the employment/severance agreements, upon the
occurrence of a termination event for severance benefits, as defined in the
applicable agreement and discussed below, each covered officer is entitled to
severance benefits including the following:

     .    Cash payment equal to one to three times (depending on officer) of the
          sum of (a) the annual base salary and (b) greater of the bonus from
          the preceding year or the average of the bonus from the three previous
          years, with a gross-up payment to offset fully the effect of any
          federal excise tax imposed on the severance payment. The aggregate
          payment potentially payable, at March 31, 2002, under this provision
          is approximately $6.0 million, excluding the effect of any gross-up
          payment, if any.
     .    Immediate vesting of all restricted stock, options and other rights
          granted to the officer.
     .    Action by Pure to prevent automatic termination of the officer's stock
          options as a result of termination.

     A termination event, as defined in the applicable agreements, for purposes
of the severance benefits is any one of the following:

     .    Termination of employment of the officer by Pure for any reason other
          than cause.
     .    Voluntarily termination of employment by the officer for good reason,
          with good reason including the following:
     .    Material change in the nature and scope of the officer's duties and
          responsibilities from those at May 26, 2000.
     .    Reduction in the officer's status with Pure below their current
          position.
     .    Reduction of the officer's base salary below the base salary
          immediately prior to May 26, 2000, except for proportionate,
          officer-wide reductions.
     .    Material diminution in the officer's eligibility to participate in the
          benefit and incentive plans of Pure provided to the officer
          immediately prior to May 26, 2000.
     .    Relocation of the officer outside the state of Texas or required
          travel in excess of the greater of (a) 90 days per year or (b) the
          level of travel of the officer the year immediately prior to May 26,
          2000.
     .    Change of control of Pure and failure to reach agreement on employment
          terms following the change of control, which terms are acceptable to
          the officer.
     .    Change of control of Unocal and failure to reach agreement on
          employment terms following the change of control, which terms are
          acceptable to the officer.
     .    Acquisition by Union Oil and its affiliates of beneficial ownership of
          85% or more of Pure's voting securities.

          Non-Dilution Agreement

          Pure and Union Oil entered into a non-dilution agreement that provides
Union Oil with the right to maintain its percentage ownership of Pure. If Pure
issues capital stock, other than common stock issued under board-approved
incentive plans, for cash or credit, Union Oil will have the right to purchase
or subscribe for the number or amount of such capital stock equal to its
ownership percentage of Pure, up to 65.4%, at the same price at which the
capital stock is being issued. Pure must provide Union Oil with notice of an
issuance subject to this preemptive right at least 10 days prior to the issuance
and, if Union Oil elects to exercise the right, it must do so in such a way as
not to delay pricing and closing of the issuance. The preemptive right given by
Pure will terminate if unexercised within 10 days after receipt of the notice of
the issuance of the capital stock.

          If Pure issues any capital stock in exchange for property other than
cash or credit, Union Oil will have the right to purchase from Pure the
additional number of shares of capital stock necessary to enable Union Oil to
maintain its ownership percentage in Pure, up to 65.4%. Pure must give Union Oil
written notice of the issuance not later than 20 days prior to such issuance,
and Union Oil will have 30 days from the date of the issuance to elect to
exercise its rights by giving written notice to Pure. The cash price per share
to be paid by Union Oil for the additional shares of capital stock will be the
market trading price per share of Pure's common stock at the time of the
issuance or in the case of other capital stock, as determined in good faith by
the Pure board of directors.

                                       14

<PAGE>

          International Paper Transaction

          Under the partnership agreement with affiliates of International Paper
the partnership has loaned, under a senior note agreement guaranteed by
International Paper, for a 30-year term, approximately $243.9 million to an
affiliate of International Paper which pays interest to the partnership
quarterly. The loan was funded through the initial contributions by Pure in
connection with the International Paper transaction. Affiliates of International
Paper own common, preferred and mezzanine capital in the partnership, of which
the partnership quarterly pays returns on the preferred capital. The partnership
has a master offset agreement which allows the partnership to offset the loan to
the International Paper affiliates with the common and preferred capital owned
by affiliates of International Paper, as a result the loan and common and
preferred capital are eliminated in the consolidated balance sheet.

          The loan to the International Paper affiliates exposes Pure, through
its ownership of the partnership, to potential credit risk. Under the terms of
the senior note agreement there are provisions to allow Pure to accelerate
payment of the loan or offset the loan against the preferred and common capital
if International Paper and its affiliates fail to perform or its credit is
downgraded pursuant to the senior note agreement. Pure believes, at the present,
the partnerships risk of loss from the loan to be remote.

          Under the terms of a partnership agreement with affiliates of
International Paper (see Note 2 on the International Paper transaction), Pure
would be required to make contingent payments to its other partners in the
partnership if Pure causes the partnership, prior to January 2008, to dispose of
assets, as defined in the partnership agreement, with a fair market value in
excess of $25 million. Pure's maximum contingent payment at March 31, 2002 is
approximately $61 million. Pure, at the present, does not believe it is probable
it will incur any of the contingent payment. To the extent Pure incurred all or
some of the contingent payment, it would reflect the contingent payment as
additional basis in its oil and gas properties.

          Other Matters

          Pure also has certain other contingent liabilities with respect to
litigation, claims and contractual agreements arising in the ordinary course of
business. On the basis of management's best assessment of the ultimate amount
and timing of these events, such expenses, or judgments, are not expected to
have a material adverse effect on Pure's financial condition or liquidity.

(5)       Accrued Abandonment, Restoration and Environmental Liabilities

          At March 31, 2002 and December 31, 2001, Pure had accrued $19.1
million and $18.0 million, respectively, for the estimated future costs to
abandon and remove wells and production facilities. The amounts were charged to
depreciation, depletion and amortization expense. The total amount chargeable to
operations for abandonment (to be predominantly accrued on a unit-of-production
basis) is estimated to be approximately $57.2 million at March 31, 2002 and
$58.6 million at December 31, 2001. These estimates are based on abandonment
cost studies performed by an independent third party and on estimates prepared
by Pure.

          Pure's accrual for environmental remediation obligations totaled $4.4
million and $4.6 million as of March 31, 2002 and December 31, 2001,
respectively. As part of the Hallwood merger, Pure recorded approximately $3.5
million in estimated environmental remediation obligations.

(6)       Incentive Plan

          Pure 1999 Incentive Plan

          In connection with the Titan merger agreement, Pure's board of
directors adopted, and Union Oil as sole stockholder of Pure approved, the Pure
1999 Incentive Plan. The plan provides that Pure may grant awards of Pure common
stock under the Pure 1999 Incentive Plan. The awards under the Pure 1999
Incentive Plan include (a) stock options that do not qualify as incentive stock
options under Section 422 of the Internal Revenue Code, (b) stock appreciation
rights, or "SARs", (c) cash awards, (d) stock awards and (e) performance awards.
These awards, other than cash awards, may be settled in shares of restricted or
unrestricted common stock of Pure.

                                       15

<PAGE>

          The number of shares of Pure common stock that may be subject to
outstanding awards under the Pure 1999 Incentive Plan at any one time is equal
to twelve percent of the total number of outstanding shares of Pure common stock
plus outstanding common stock equivalents, as defined in the 1999 Pure Incentive
Plan, minus the total number of shares of Pure common stock subject to
outstanding awards under any other stock-based plan for employees or directors
of Pure. The number of shares authorized under the Pure 1999 Incentive Plan and
the number of shares subject to an award under the Pure 1999 Incentive Plan will
be adjusted for stock splits, stock dividends, recapitalizations, mergers, and
other changes affecting the capital stock of Pure.

          The board of directors of Pure or any committee designated by it will
administer the Pure 1999 Incentive Plan. Currently, Pure's Compensation
Committee administers the plan and has broad discretion to administer the Pure
1999 Incentive Plan, interpret its provisions and adopt policies for
implementing the Pure 1999 Incentive Plan.

          The following table calculates the number of shares or options
available to grant under Pure's 1999 Incentive Plan as of March 31, 2002:

Common stock outstanding                                            50,206,347
Options awarded under the Pure 1999 Incentive Plan                   6,451,743
Assumed options from Titan                                             458,011
Options exercised                                                     (202,281)
Options cancelled/forfeited                                           (249,995)
                                                                    ----------
Common stock equivalents                                            56,663,825
                                                                    ==========

Maximum shares/options allowed under the Pure 1999 Incentive Plan    6,799,659

Less:  Outstanding awards under the Pure 1999 Incentive Plan        (6,084,079)
       Outstanding options under the Titan Plans                      (373,399)
                                                                    ----------
Shares/options available for future grant                              342,181
                                                                    ==========

          Pure granted 98,453, 856,146 and 1,366,560 options to non-officers in
2002, 2001 and 2000, respectively. Certain grants in 2000 were made with an
exercise price below Pure's stock price on the date of grant; consequently, Pure
recorded deferred compensation of $2.9 million. The deferred compensation will
be amortized over the vesting period, generally four years.

                                       16

<PAGE>

The following table sets forth the stock options held by Pure's officers as of
March 31, 2002:

Exercise      Number of
  Price        Options
--------      ---------
 $ 8.58          15,629
   9.30       2,320,000
  10.83          78,847
  14.53          86,046
  15.69           8,546
  17.08         940,000
  17.63         300,000
  18.35         351,000
  19.31           9,959
  19.60          10,014
  21.36           6,241
  26.89           4,302
              ---------
              4,130,584
              =========

                                       17

<PAGE>

(7)       Earnings per Share

          The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
                                                                              Three Months Ended March 31,
                                                                              ----------------------------
                                                                                     2002      2001
                                                                                   -------    -------
<S>                                                                                <C>        <C>
Numerator:
   Income (loss) from continuing operations and numerator for basic and
   diluted income (loss) per share from continuing operations                      $(7,960)   $32,881
                                                                                   =======    =======
   Net income (loss) and numerator for basic and diluted net income
   (loss) per share                                                                $(7,343)   $33,416
                                                                                   =======    =======
Denominator:

   Denominator for basic income (loss) per share from continuing
   operations and net income (loss) - weighted average common shares                50,184     50,039

   Effect of dilutive securities - employee stock options not subject to
   "put" right                                                                          --        262

   Dilutive effect of officers' stock options subject to the "put" right
   under employment/severance agreements (Note 4)                                       --        912

   Dilutive effect of officers' individual common stock held subject to the
   "put" right under employment/severance agreements (Note 4)                           --        271
                                                                                   -------    -------

   Denominator for diluted income (loss) per share from continuing
   operations and net income (loss) - adjusted weighted average common
   shares and assumed conversions                                                   50,184     51,484
                                                                                   =======    =======

   Basic income (loss) per share from continuing operations                        $ (0.16)   $  0.66
                                                                                   =======    =======
   Diluted income (loss) per share from continuing operations                      $ (0.16)   $  0.64
                                                                                   =======    =======

   Basic net income (loss) per share                                               $ (0.15)   $  0.67
                                                                                   =======    =======

   Diluted net income (loss) per share                                             $ (0.15)   $  0.65
                                                                                   =======    =======
</TABLE>

          Employee stock options to purchase 6,457,478 shares of common stock
were outstanding at March 31, 2002, none were included in the computation of
diluted net loss per common share because Pure had a loss from continuing
operations and the effect would be anti-dilutive.

          Employee stock options to purchase 5,572,919 shares of common stock
were outstanding at March 31, 2001, but only 3,949,360 were included in the
computation of diluted net income per common share because the employee stock
options' exercise price was greater than the average market price of the common
stock of Pure.

                                       18

<PAGE>

(8)       Derivative Financial Instruments

          In 2001, Pure adopted Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
as amended by SFAS No. 137 and SFAS No. 138 which resulted in recording a $17.5
million, ($11.4 million net of tax) decline in fair value to accumulated other
comprehensive income. At March 31, 2002, the estimated net amount of the
existing gains within accumulated other comprehensive income that are expected
to be reclassified into earnings within the next 12 months is approximately $3.2
million, net of tax. For the three-months ended March 31, 2002 and 2001, other
income includes approximately $432,000 and $808,000 of gain from changes in fair
value of derivatives not qualifying as hedges and approximately ($1.6 million)
and $392,000 of gain (loss) from the ineffective portion of the cash flow
hedges, respectively.

          Enron Bankruptcy

          In the fourth quarter of 2001, Pure and many other parties were
affected by the bankruptcy of Enron Corp. and subsidiaries. Pure had various
natural gas and crude oil swaps with Enron. As a result of the Enron bankruptcy,
Pure terminated its derivative contracts with certain Enron subsidiaries. At the
termination date of the contracts, Enron's subsidiaries owed Pure a net
receivable of approximately $2.0 million. In the fourth quarter of 2001, the
Enron cash flow hedges were no longer highly effective as a result of the
increased credit risk associated with Enron; accordingly, Pure ceased hedge
accounting and marked-to-market the Enron derivatives up to the termination date
and provided an allowance for substantially all amounts owed Pure, which was
charged to other expense in the fourth quarter of 2001.

          Commodity Derivatives

          Pure may utilize various option and swap contracts and other financial
instruments to economically hedge the effect of price changes on future oil and
gas production and changes in interest rates related to Pure's debt obligations.
The counterparties to Pure's financial instruments may include regulated
exchanges, international and domestic financial institutions and other
industrial companies. All of the counterparties to Pure's financial instruments
must pass certain credit requirements deemed sufficient by management before
trading financial instruments with Pure. These counterparties may expose Pure to
losses in the event of non-performance. In the opinion of management, the
off-balance-sheet risk associated with these instruments is immaterial.

                                       19

<PAGE>

          The following table sets forth the future volumes by year and the
range of prices to be received based upon the fixed price of the individual
option and swap contracts and other financial instruments outstanding at March
31, 2002:

                                                             2002
                                                       ---------------

Gas related derivatives:
   Collar and swap options:
        Volume (MMBtu)                                  19,180,000
        Index price per MMBtu (floor-ceiling prices)   $2.50 - $4.07

   Basis differential swaps:
        Volume (MMBtu)                                     270,000
        Index price per MMBtu                          $0.16 - $0.31

Oil related derivatives:
   Collar and swap options:
        Volume (Bbls)                                      130,000
        Index price per Bbl (floor-ceiling prices)     $24.00 - $28.55

          The index price for the natural gas collars and swaps settles based on
either a NYMEX Henry hub or a Permian Basin hub. The oil collars and swaps
settle based on the prices for West Texas Intermediate on NYMEX. The basis
differential swaps lock in the basis differential between NYMEX Henry Hub and
the Waha West Texas delivery point.

          In the Hallwood merger, Pure marked-to-market as of the merger date
all the outstanding financial derivatives held by Hallwood which resulted in a
liability of approximately $31.2 million. At March 31, 2002, the above table
includes oil and gas derivatives acquired in the Hallwood merger (a) 220,000
MMBtu's of natural gas at a swap price of $3.96 per MMBtu and (b) 55,000 Bbls of
oil at a swap price of $24.25 per barrel.

          As a result of the Titan merger, Pure marked-to-market as of the
merger date all the outstanding financial derivatives held by Titan which
resulted in a liability of approximately $19.3 million. The deferred commodity
hedges amount were amortized as a non-cash benefit to oil and gas revenues over
the remaining term of the hedges as the related production took place. This
amortization was completed as of June 30, 2001.

          Interest Rate Derivatives

          At March 31, 2002, Pure has $37.5 million in notional principal of
fixed for floating interest rate swaps, which were acquired as part of the
Hallwood merger. Pure pays a fixed rate of 5.23% and receives a LIBOR floating
rate. The derivative contracts mature in February 2004. These derivative
contracts do not qualify as cash flow hedges as a result of the mismatch of
maturities with Pure's debt instruments and, accordingly, is marked-to-market
each reporting period.


                                       20

<PAGE>

(9)       Other Liabilities

          The other current liabilities consist of the following (in thousands):

                                          March 31,   December 31,
                                            2002          2001
                                          ---------   ------------
Accrued oil and gas production expenses    $41,240       $48,896
Income taxes payable                         2,251         1,394
Accrued interest payable                     8,242         1,517
Other                                        1,107           711
                                           -------       -------
                                           $52,840       $52,518
                                           =======       =======

(10)      Exploration and Abandonment

          Exploration and abandonment expense consist of the following (in
thousands):

                                   Three months ended March 31,
                                   ----------------------------
                                          2002     2001
                                         ------   ------
Geological and geophysical staff         $2,279   $1,438
Exploratory dry hole costs                3,241      379
Impaired unproved properties                450      374
Plugging and abandonment costs              190       --
Seismic costs                             1,411      600
Other                                       519      548
                                         ------   ------
                                         $8,090   $3,339
                                         ======   ======

                                       21

<PAGE>

(11)      Comprehensive Income (Loss)

<TABLE>
<CAPTION>
                                                                   Three months ended March 31,
                                                                   ----------------------------
                                                                          2002      2001
                                                                        -------   --------
<S>                                                                     <C>       <C>
Net income (loss)                                                       $(7,343)  $ 33,416

   Cumulative effect of accounting change
     for SFAS No. 133 adoption (a)                                           --    (11,364)
   Reclassification adjustment for settled hedging contracts (b)          2,580      8,657
   Changes in fair value of expected cash flows (c)                       4,289      1,581
                                                                        -------   --------

Comprehensive income (loss)                                             $  (474)  $ 32,290
                                                                        =======   ========

----------
     (a) Net of tax of:                                                 $    --   $  6,119
     (b) Net of tax of:                                                 $ 1,389   $ (4,662)
     (c) Net of tax of:                                                 $ 2,310   $   (989)

</TABLE>

                                       22

<PAGE>

(12)      Discontinued Operations

          Pure regularly reviews its portfolio of assets for potential
dispositions and receives offers to buy certain of its assets. In March 2002,
Pure received and accepted an offer to sell properties located in the Permian
Basin region for $23 million, subject to adjustments. The properties sold were
an insignificant portion of the value of Pure's reserves. In accordance with
SFAS No. 144, Pure is required to reflect this disposition of assets as
discontinued operations.

          The following are the results of operations from the discontinued
operations:

<TABLE>
<CAPTION>
                                                     Three months ended March 31,
                                                     ----------------------------
                                                           2002       2001
                                                          ------     ------
                                                     (dollars in thousands except
                                                          per share amounts)

<S>                                                       <C>        <C>
Oil and gas sales                                         $1,075     $1,698
Operating costs                                             (360)    $ (565)
Depletion, depreciation and amortization                    (436)      (309)
Other costs                                                   --         (1)
Income taxes                                                 (98)      (288)
                                                          ------     ------
    Income from discontinued operations                      181        535
                                                          ------     ------

Gain on disposal before taxes                                671         --
Income taxes                                                (235)        --
                                                          ------     ------
    Gain on disposal                                         436         --
                                                          ------     ------
         Total income from discontinued operations        $  617     $  535
                                                          ======     ======

Basic income per share:

    Income from discontinued operations                   $ 0.00     $ 0.01
    Gain on disposal                                        0.01         --
                                                          ------     ------
         Total income from discontinued operations        $ 0.01     $ 0.01
                                                          ======     ======

Diluted income per share:

    Income from discontinued operations                   $ 0.00     $ 0.01
    Gain on disposal                                        0.01         --
                                                          ------     ------
         Total income from discontinued operations        $ 0.01     $ 0.01
                                                          ======     ======
</TABLE>

                                       23

<PAGE>

(13)      Supplemental Condensed Consolidating Financial Information

          Certain subsidiaries of Pure have fully and unconditionally guaranteed
the 7.125% senior notes. The following tables present the condensed
consolidating financial information as March 31, 2002 and December 31, 2001 and
for each of the three-month periods ended March 31, 2002 and 2001 for (a) Pure
(Parent), (b) Guarantor subsidiaries and (c) Non-guarantor subsidiaries.
Virtually all of Pure's operations are conducted by Pure's subsidiaries.

                                       24

<PAGE>

Condensed Consolidated Balance Sheet
March 31, 2002
(in thousands)

<TABLE>
<CAPTION>
                                                                                        Non-
                                                          Pure       Guarantor        Guarantor
                                                        (Parent)    Subsidiaries     Subsidiaries   Eliminations   Consolidated
                                                      ------------  ------------     ------------   ------------   ------------

<S>                                                   <C>           <C>              <C>            <C>            <C>
Assets

     Current assets:

          Cash and cash equivalents                   $     2,859   $    (3,387)     $     4,407    $         -    $     3,879
          Accounts receivable                               6,408        43,219            9,465              -         59,092
          Other current assets                                325         3,387               15              -          3,727
                                                      ------------  ------------     ------------   ------------   ------------
               Total current assets                         9,592        43,219           13,887              -         66,698
                                                      ------------  ------------     ------------   ------------   ------------

     Properties, net                                            -     1,070,897          238,161              -      1,309,058
     Investment in subsidiaries                           586,321     2,740,700           48,626     (3,375,647)             -
     Deferred compensation                                 17,101             -                -              -         17,101
     Other assets                                           5,071        10,948          244,630       (243,937)        16,712
                                                      ------------  ------------     ------------   ------------   ------------
               Total assets                           $   618,085   $ 3,865,764      $   545,304    $(3,619,584)   $ 1,409,569
                                                      ============  ============     ============   ============   ============


Liabilities and equity

     Current liabilities:

          Accounts payable                            $     6,554   $    51,694      $     4,254    $         -    $   $62,502
          Other current liabilities                        10,379        43,718            1,677              -         55,774
                                                      ------------  ------------     ------------   ------------   ------------
               Total current liabilities                   16,933        95,412            5,931              -        118,276
                                                      ------------  ------------     ------------   ------------   ------------

     Long-term debt                                       561,569             -                -              -        561,569
     Accrued abandonment, restoration and
       environmental liabilities                                -        22,541            1,026              -         23,567
     Deferred income taxes                                   (367)      139,496           (7,363)             -        131,766
     Other liabilities                                          -        12,953              567              -         13,520

     Common stock subject to repurchase                    69,224             -                -              -         69,224

     Minority interest                                          -             -            1,608          5,000          6,608

     Equity                                               (29,274)    3,595,362          543,535     (3,624,584)       485,039
                                                      ------------  ------------     ------------   ------------   ------------
               Total liabilities and equity           $   618,085   $ 3,865,764      $   545,304    $(3,619,584)   $ 1,409,569
                                                      ============  ============     ============   ============   ============
</TABLE>

                                       25

<PAGE>

Condensed Consolidated Balance Sheet
December 31, 2001
(in thousands)

<TABLE>
<CAPTION>
                                                                                 Non-
                                                    Pure      Guarantor      Guarantor
                                                  (Parent)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                                  --------   ------------   ------------   ------------   ------------
<S>                                               <C>         <C>             <C>          <C>             <C>
Assets

      Current assets:

             Cash and cash equivalents            $  5,220    $      273      $    100     $        --     $    5,593
             Accounts receivable                     6,293        42,835        17,045              --         66,173
             Other current assets                      188         6,476            15              --          6,679

                                                  --------    ----------      --------     -----------     ----------
                   Total current assets             11,701        49,584        17,160              --         78,445
                                                  --------    ----------      --------     -----------     ----------

      Properties, net                                   --     1,081,029       242,959              --      1,323,988
      Investment in subsidiaries                   585,551     2,724,156        47,586      (3,357,293)            --
      Deferred compensation                         14,982            --            --              --         14,982
      Other assets                                   5,344        11,403       244,583        (243,937)        17,393

                                                  --------    ----------      --------     -----------     ----------
                   Total assets                   $617,578    $3,866,172      $552,288     $(3,601,230)    $1,434,808
                                                  ========    ==========      ========     ===========     ==========

Liabilities and equity

      Current liabilities:

             Accounts payable                     $  6,598    $   49,760      $  4,355     $        --     $   60,713
             Other current liabilities               2,747        48,865         1,526              --         53,138

                                                  --------    ----------      --------     -----------     ----------
                   Total current liabilities         9,345        98,625         5,881              --        113,851
                                                  --------    ----------      --------     -----------     ----------

      Long-term debt                               586,703            --            --              --        586,703
      Accrued abandonment, restoration and
        environmental liabilities                       --        21,696           915              --         22,611
      Deferred income taxes                           (164)      142,867        (7,434)             --        135,269
      Other liabilities                                 --        11,537           509              --         12,046

      Common stock subject to repurchase            69,800            --            --              --         69,800

      Minority interest                                 --            --         1,445           5,000          6,445

      Equity                                       (48,106)    3,591,447       550,972      (3,606,230)       488,083

                                                  --------    ----------      --------     -----------     ----------
                   Total liabilities and equity   $617,578    $3,866,172      $552,288     $(3,601,230)    $1,434,808
                                                  ========    ==========      ========     ===========     ==========
</TABLE>

                                       26

<PAGE>

Condensed Consolidated Statement of Operations
For the three months ended March 31, 2002
(in thousands)

<TABLE>
<CAPTION>
                                                                                          Non-
                                                           Pure         Guarantor       Guarantor
                                                         (Parent)      Subsidiaries    Subsidiaries    Eliminations    Consolidated
                                                       ------------    ------------    ------------    ------------    ------------

<S>                                                    <C>             <C>             <C>             <C>             <C>
Revenues:

     Oil and gas sales                                 $          -    $     78,946    $      8,459    $          -    $     87,405
     Other operating revenues                                     -             994               1               -             995
                                                       ------------    ------------    ------------    ------------    ------------
               Total revenues                                     -          79,940           8,460               -          88,400
                                                       ------------    ------------    ------------    ------------    ------------

Expenses:

     Operating and other expenses                               412          31,278           3,280               -          34,970
     Amortization of deferred compensation                    8,266               -               -               -           8,266
     Exploration and abandonments                                 -           8,088               2               -           8,090
     Depreciation, depletion and amortization                   296          32,422           5,804               -          38,522
                                                       ------------    ------------    ------------    ------------    ------------
               Total expenses                                 8,974          71,788           9,086               -          89,848
                                                       ------------    ------------    ------------    ------------    ------------

               Operating income (loss)                       (8,974)          8,152            (626)              -          (1,448)

Other income (expense):

     Equity in earnings of subsidiaries                         771          20,224           1,040         (22,035)              -
     Interest expense                                        (8,443)             (6)              -               -          (8,449)
     Other                                                    6,457          (7,916)          4,861          (4,083)           (681)
                                                       ------------    ------------    ------------    ------------    ------------
               Income (loss) before income taxes
                 and minority interest                      (10,189)         20,454           5,275         (26,118)        (10,578)

Income tax expense                                            2,846               5             (70)              -           2,781
Minority interest                                                 -               -            (163)              -            (163)
                                                       ------------    ------------    ------------    ------------    ------------

               Income (loss) from continuing operations      (7,343)         20,459           5,042         (26,118)         (7,960)

Income from discontinued operations                               -             617               -               -             617
                                                       ------------    ------------    ------------    ------------    ------------

               Net income (loss)                       $     (7,343)   $     21,076    $      5,042    $    (26,118)   $     (7,343)
                                                       ============    ============    ============    ============    ============
</TABLE>

                                       27

<PAGE>

Condensed Consolidated Statement of Operations
For the three months ended March 31, 2001
(in thousands)

<TABLE>
<CAPTION>
                                                                               Non-
                                                   Pure       Guarantor     Guarantor
                                                 (Parent)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
                                                 --------   ------------   ------------   ------------   ------------
<S>                                              <C>          <C>            <C>            <C>            <C>
Revenues:

      Oil and gas sales                          $     --     $107,661       $16,995        $     --       $124,656
      Other operating revenues                         --           22            --              --             22
                                                 --------     --------       -------        --------       --------
             Total revenues                            --      107,683        16,995              --        124,678
                                                 --------     --------       -------        --------       --------
Expenses:

      Operating and other expenses                    367       26,587         4,161              --         31,115
      Amortization of deferred compensation        12,693           --            --              --         12,693
      Exploration and abandonments                     --        3,339            --              --          3,339
      Depreciation, depletion and amortization         74       15,776         8,153              --         24,003
                                                 --------     --------       -------        --------       --------
             Total expenses                        13,134       45,702        12,314              --         71,150
                                                 --------     --------       -------        --------       --------

             Operating income (loss)              (13,134)      61,981         4,681              --         53,528

Other income (expense):

      Equity in earnings of subsidiaries           44,643        4,510            --         (49,153)            --
      Interest expense                             (4,039)         (11)           --                         (4,050)
      Other                                            --        1,347             1              --          1,348
                                                 --------     --------       -------        --------       --------
             Income (loss) before income taxes
               and minority interest               27,470       67,827         4,682         (49,153)        50,826

Income tax expense                                  5,946      (23,719)          (13)             --        (17,786)
Minority interest                                      --           --          (159)             --           (159)
                                                 --------     --------       -------        --------       --------
             Income (loss) from continuing
               operations                        $ 33,416     $ 44,108       $ 4,510        $(49,153)      $ 32,881

Income from discontinued operations                    --          535            --              --            535
                                                 --------     --------       -------        --------       --------

             Net income (loss)                   $ 33,416     $ 44,643       $ 4,510        $(49,153)      $ 33,416
                                                 ========     ========       =======        ========       ========

</TABLE>

                                       28

<PAGE>

Condensed Consolidated Statement of Cash Flows
For the three months ended March 31, 2002
(in thousands)
<TABLE>
<CAPTION>
                                                                                                Non-
                                                                    Pure       Guarantor      Guarantor
                                                                  (Parent)    Subsidiaries  Subsidiaries  Eliminations  Consolidated
                                                                ------------  ------------  ------------  ------------  ------------
<S>                                                              <C>           <C>           <C>           <C>           <C>
Cash flows from operating activities                             $   22,469    $   30,805    $    5,192    $        -    $   58,466

Cash flows from investing activities:

     Capital expenditures and acquisitions                                -       (60,065)         (885)            -       (60,950)
     Proceeds from sale of assets                                         -         3,150             -             -         3,150
     Proceeds from sale of assets - discontinued operations               -        22,450                                    22,450
                                                                 ----------    ----------    ----------    ----------    ----------
          Net cash used in investing activities                           -       (34,465)         (885)            -       (35,350)
                                                                 ----------    ----------    ----------    ----------    ----------

Cash flows from financing activities:

     Change in debt                                                 (25,200)            -             -             -       (25,200)
     Other                                                              370             -             -             -           370
                                                                 ----------    ----------    ----------    ----------    ----------
          Net cash provided by (used in)
           financing activities                                     (24,830)            -             -             -       (24,830)
                                                                 ----------    ----------    ----------    ----------    ----------

Increase (decrease) in cash and cash equivalents                     (2,361)       (3,660)        4,307             -        (1,714)

Cash and cash equivalents, beginning of period                        5,220           273           100             -         5,593
                                                                 ----------    ----------    ----------    ----------    ----------
Cash and cash equivalents, end of period                         $    2,859    $   (3,387)   $    4,407    $        -    $   $3,879
                                                                 ==========    ==========    ==========    ==========    ==========
</TABLE>

Condensed Consolidated Statement of Cash Flows
For the three months ended March 31, 2001
(in thousands)
<TABLE>
<CAPTION>
                                                                                                Non-
                                                                   Pure       Guarantor      Guarantor
                                                                 (Parent)    Subsidiaries  Subsidiaries  Eliminations  Consolidated
                                                               ------------  ------------  ------------  ------------  ------------
<S>                                                             <C>           <C>           <C>           <C>           <C>
Cash flows from operating activities                            $(242,123)    $  77,554     $  2,361      $  239,957      $  77,749

Cash flows from investing activities:

      Capital expenditures and acquisitions                             -       (74,869)      (1,833)       (239,957)      (316,659)
      Proceeds from sale of assets                                      -           551            -               -            551
      Other                                                             -             -     (239,957)        239,957              -
                                                                ---------     ---------     --------      ----------      ---------
             Net cash used in investing activities                      -       (74,318)    (241,790)              -       (316,108)
                                                                ---------     ---------     --------      ----------      ---------

Cash flows from financing activities:

      Change in debt                                              242,856        (3,000)           -               -        239,856
      Other                                                            48             -      244,957        (239,957)         5,048
                                                                ---------     ---------     --------      ----------      ---------
             Net cash provided by (used in)
               financing activities                               242,904        (3,000)     244,957        (239,957)       244,904
                                                                ---------     ---------     --------      ----------      ---------
Increase (decrease) in cash and cash equivalents                      781           236        5,528               -          6,545

Cash and cash equivalents, beginning of period                         (4)        3,329            -               -          3,325
                                                                ---------     ---------     --------      ----------      ---------
Cash and cash equivalents, end of period                        $     777     $   3,565     $  5,528      $        -      $   9,870
                                                                =========     =========     ========      ==========      =========
</TABLE>

                                       29

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

General

          Pure is an independent energy company engaged in the exploitation,
development, exploration and acquisition of oil and gas properties. Pure's
strategy is to grow reserves, production, cash flows and net income per share
by:

          .    identifying acquisition opportunities that provide significant
               development and exploratory drilling potential,
          .    exploiting and developing its reserve base,
          .    pursuing exploration opportunities for oil and gas reserves,
          .    capitalizing on advanced technology to identify, explore and
               exploit projects, and
          .    emphasizing a low overhead and operating cost structure.

Impact of Commodity Prices

          Our revenues, operating results and future growth depend substantially
on prevailing oil and natural gas prices. Price volatility in the oil and
natural gas markets has remained prevalent in the last few years. During 1998
and through the first quarter of 1999, we experienced a decline in energy
commodity prices. However, in the summer of 1999 and continuing into early 2000,
prices improved. The average prices received by producers in all our core areas
rose sharply in the first half of 2001 and 2000 compared to 1999. The NYMEX
average price for crude oil and natural gas was $19.30 per barrel and $2.32 per
Mcf for 1999, compared to $30.25 per barrel and $4.32 per Mcf for 2000 and
compared to $26.00 per barrel and $4.14 per Mcf in 2001, respectively. In the
first quarter of 2002 the NYMEX average prices were $21.63 per barrel of crude
oil and $2.49 per Mcf of natural gas. At March 31, 2002, the NYMEX prices for
crude oil and natural gas were $26.31 per barrel and $3.28 per Mcf,
respectively. By way of comparison, at May 2, 2002, the NYMEX prices for crude
oil and natural gas were $26.24 per barrel and $3.68 per Mcf, respectively.

          In an effort to mitigate the impact of commodity prices Pure, at
times, utilizes financial commodity derivatives. At March 31, 2002, Pure has
financial commodity derivatives for 19,180,000 MMBtu of natural gas and 130,000
barrels of crude oil to mitigate the impact of commodity prices on its estimated
2002 production.

          Low prices for crude oil, natural gas or other commodities sold by
Pure could have a material adverse effect on Pure's results of operations and
cash flows, on the quantities of crude oil and natural gas that can be
economically produced from its fields, and on the quantities and economic values
of its proved reserves and potential resources. Such adverse pricing scenarios
could result in write-downs of the carrying values of Pure's properties and
materially adversely affect Pure's financial condition, as well as its results
of operations and cash flows.

Recent Events

          In the second quarter of 2002, Pure is planning on closing its Corpus
Christi, Texas office and consolidating the operations primarily into its
Houston, Texas office. The primary reason for the closure is a reduction in the
activities conducted by the Corpus Christi office and the ability to conduct
Pure's south Texas activities from its Houston office. As a result of this
closure, Pure will incur a charge in the second quarter of 2002 of approximately
$1.5 million related to the severance and closure costs. Pure expects to achieve
annual savings of approximately $3 to $3.5 million in general and administrative
and exploration staff costs.

          In the first quarter of 2002, Pure sold properties located in the
Permian Basin region, with an effective date of January 1, 2002, for
approximately $23 million, subject to adjustments. As a result of selling these
properties, Pure was required to reflect this disposition of assets as
discontinued operations under the provisions of the SFAS No. 144 which Pure was
required to adopt on January 1, 2002.

                                       30

<PAGE>

Hallwood Merger

          On March 30, 2001, Pure and Hallwood Energy Corporation ("Hallwood")
announced the signing of a definitive merger agreement pursuant to which Pure
Resources II, Inc., an indirect wholly-owned subsidiary of Pure, would acquire
all the outstanding shares of common stock of Hallwood at a price of $12.50 per
share and all the outstanding shares of Series A Cumulative Preferred Stock of
Hallwood at a price of $10.84 per share. The all-cash transaction was structured
as a first step tender offer followed by a cash merger to acquire all remaining
shares of Hallwood. Total cash purchase price for the transaction is estimated
to be approximately $260.4 million, including assumed debt. Purchase accounting
treatment was utilized in this transaction which resulted in a total purchase
price of approximately $275.6 million.

          On May 8, 2001, Pure accepted for payment approximately 85% of the
common stock and 78% of the preferred stock of Hallwood. On May 30, 2001, after
completion of a subsequent tender offer period, Pure completed the acquisition
of the remaining common and preferred shares through consummation of the cash
merger. The results of operations of Hallwood have been included in Pure's since
May 1, 2001.

          At May 1, 2001, Pure estimated the total proved reserves acquired (SEC
10% basis) to have been approximately 36,800 MBOE with an SEC 10% present value
at approximately $386 million. The total proved reserves were approximately 80%
natural gas. The Hallwood properties are primarily located in the Permian Basin,
the San Juan Basin, South Texas and onshore southern Louisiana.

International Paper Transaction

          On January 31, 2001, Pure (a) acquired oil and gas properties, fee
mineral and royalty interests from International Paper Company and (b)
contributed cash for a controlling general and limited partnership interests, in
a partnership that owns oil and gas properties contributed by International
Paper, for a total of approximately $261 million, subject to adjustment, for
cash. The transaction was funded from Pure's credit facilities.

          The transaction provides Pure with additional areas of focus,
primarily offshore in the Gulf of Mexico and in the Gulf Coast region covering
Texas, Louisiana, Arkansas, Mississippi, Alabama and Florida. Pure also acquired
over 6 million gross (3.2 million net) acres of fee mineral ownership, primarily
across the southern Gulf Coast region of the United States.

          At December 31, 2000, Pure estimated the total proved reserves
acquired (SEC 10% basis) to have been approximately 25,000 MBOE with an SEC 10%
present value of approximately $629 million. The total proved reserves were
approximately 69% natural gas, and 96% of the reserves are proved developed.

Business Opportunities Agreement

          On December 13, 1999, Titan Exploration, Inc. ("Titan") and Union Oil
Company of California ("Union Oil") entered into an agreement to merge Titan and
the Permian Basin business unit of Union Oil into a new company. The resulting
company is Pure Resources, Inc.

          In order to minimize conflicts of interest between Union Oil and Pure
and to permit Union Oil to continue to conduct its business without undue risk
of liability, the parties entered into a business opportunities agreement in
which Pure agreed that it has no interest or expectancy in business
opportunities developed by Union Oil in accordance with standards set forth in
the business opportunities agreement. Pure also agreed that, without the consent
of Union Oil, it will not conduct any business other than the oil and gas
exploration, development and production business and will not pursue any new
business opportunities that are outside of certain geographic areas. As a result
of the business opportunities agreement, as affected by limited waivers that
Pure has obtained from Union Oil, Pure is contractually prohibited from
conducting business outside of the continental United States and designated
areas in the offshore Gulf of Mexico region of the United States, which
designated areas relate to the programs and partnerships Pure acquired in the
International Paper transaction. Further, unless conducted through one of such
programs or partnerships, Pure is prohibited from conducting business in the
designated offshore areas if the opportunity relates to a prospect with gross
unrisked reserve target potential of less than 20 Bcf without Union Oil's
consent. Also, the limited waiver with respect to the offshore areas will
terminate on March 31, 2003, if Union

                                       31

<PAGE>

Oil notifies Pure in September 2002 that it will not extend the limited waiver.
The restrictions on our ability to expand, develop and explore certain offshore
assets related to those acquired from International Paper may limit our ability
to realize fully the value of certain of the acquired assets. Because of Pure's
geographic concentration, any regional events that increase costs, reduce
availability of equipment or supplies, reduce demand or limit production may
impact Pure more than if its operations were more geographically diversified.
The business opportunities agreement does not affirmatively restrict Union Oil's
business activities, including within the designated areas. However, the
agreements remaining restrictions may limit Pure's ability to diversify its
operating base and may limit its ability to realize fully the value of certain
of the assets acquired in the International Paper transaction.

Employment/Severance Arrangements

     Put Right

     Pursuant to the employment and/or severance and put right agreements
("employment/severance agreements") entered into between Pure and its officers,
under certain circumstances described below, each covered officer has the right
to require Pure to purchase ("put right"), at a price equal to the "net asset
value" per share, the shares of Pure common stock:

..    Received by the officer in the Titan merger in exchange for shares of Titan
     common stock held by the officer on December 1, 1999 (of which there were
     2,796,107 Pure shares held subject to the put right at March 31, 2002). At
     March 31, 2002, with the net asset value per share of $17.49, Pure's
     obligation to purchase this common stock was approximately $48.9 million.
..    Acquired by the officer pursuant to exercise of stock options currently
     held or granted in the future, (see Note 6 of Notes to Consolidated
     Financial Statements for the shares underlying the stock option subject to
     the put right at March 31, 2002 and the applicable exercise prices). At
     March 31, 2002, there were 4,130,584 stock options subject to the put
     right, of which 3,449,068 had exercise prices that were less than the net
     asset value per share of $17.49 at March 31, 2002. Pure would receive
     proceeds of approximately $40.0 million if the 3,449,068 of stock options
     were exercised and Pure's obligation to purchase the 3,449,068 shares, at
     the net asset value per share of $17.49 at March 31, 2002, was
     approximately $60.3 million. Accordingly, Pure's net obligation related to
     the stock options subject to the put right at March 31, 2002 was
     approximately $20.3 million.

          The put right is exercisable by the covered officer upon the
occurrence of a "put event" by providing written notice to Pure within 90 days
after the date of the put event. The date of that exercise notice establishes
the "put date" for purposes of making certain calculations to be utilized in the
closing of the related purchase of shares, or "put closing." If the officer
either does not exercise the put right in a situation other than in connection
with a change of control of Pure or Unocal, or exercises the put right with
respect to only a portion of the covered shares, the officer cannot later cause
Pure to purchase additional shares after another put event. A put event means
any one of the following:

..    Termination of the officer's employment for any reason after May 25, 2003
     (for example, as a result of voluntary resignation or termination for
     cause, as defined in the applicable agreement).
..    Termination of the officer's employment by Pure without cause, as defined
     in the applicable agreement.
..    Change of control, as defined in the applicable agreement, of Pure.
..    Change of control, as defined in the applicable agreement, of Unocal.
..    Death or disability of the officer.
..    Resignation of the officer for good reason, as defined in the applicable
     agreement and discussed below.
..    Acquisition by Union Oil and its affiliates of beneficial ownership of 85%
     or more of Pure's voting securities.

          If a put event occurs and one or more of the covered officers
exercises the put right, Pure will require cash to satisfy its obligation to
purchase the shares covered by the put exercise. Because the
employment/severance agreements provide the covered officer the right to include
in the amount of shares to be purchased by Pure any specified shares that are
acquired pursuant to stock option exercises after the put event or put date but
before the related put closing, Pure may receive cash from stock option
exercises in connection with exercises of the put right. If Pure does not have
enough cash, net of the amount received by Pure in related stock option
exercises, to satisfy its obligations, Pure would have to incur additional
indebtedness. At March 31, 2002, the net amount of required cash, assuming all
individuals subject to the put exercise their put right at the net asset value
per share of $17.49, is estimated to be $69.2 million (which is reflected in the
consolidated balance sheet as the amount of the common

                                       32

<PAGE>

stock subject to repurchase). At the end of the calendar quarters since the
origination of the employment/severance agreements containing the put right, the
amount of the common stock subject to repurchase has ranged from $69.2 million
to $155.5 million, as calculated in accordance with the following paragraph.
Accordingly, it could require substantial financial resources of Pure to fund
the put right.

          The net asset value per share is computed by dividing the net asset
value, as defined below, by the number of fully-diluted outstanding shares. The
net asset value is computed as 110% of the pre-tax present value (discounted at
10%) of Pure's proved reserves, utilizing the average of the three-year NYMEX
commodity strip price for the 120 days prior to the put date (adjusted for
commodity hedges in place at the put date), less the funded debt of Pure at the
put date. Funded debt was approximately $564 million at March 31, 2002. The
calculated number of fully-diluted outstanding shares as the sum of (a) the
total issued and outstanding common shares of Pure at the put date and (b) the
total number of outstanding stock options (regardless of whether the options are
in-the-money or out-of-the-money) or other securities convertible into common
stock as of the put date (for both management and employees).

     For purposes of valuing the proved reserves, the board of directors of
Pure, in its sole discretion, will determine the proved reserves ("initial
valuation"). Messrs. Hightower and Staley have the right to request a second
valuation at their expense by a third party independent engineering firm
("second valuation"). If the second valuation is not acceptable to Pure, Pure
must select another third party independent engineering firm to perform a third
evaluation ("final valuation") and the cost of the final valuation will be
shared equally by Pure and the officer. If the final evaluation exceeds the
second valuation, the second valuation must be used to determine the net asset
value. If the initial valuation exceeds the final evaluation, the initial
valuation must be used to determine the net asset value. If the final evaluation
is between the initial valuation and the second valuation, an average of all
three evaluations must be used to determine the value of the proved reserves.

          At March 31, 2002, the net asset value per share (based on the data
above) was estimated to be $17.49 and Pure's common stock price closed at $22.58
per share.

     The $69.2 million reflected in the consolidated balance sheet at March 31,
2002 as common stock subject to repurchase is based on the net asset value per
share of $17.49 discussed above and has been calculated as (a) the amount
required to purchase all covered shares of common stock (including shares
underlying stock options) of all covered officers, less (b) the proceeds Pure
would receive from the exercise by all covered officers of all of their
in-the-money stock options (options whose exercise price is less than the net
asset value per share).

     The gross deferred compensation related to Pure's potential obligations to
purchase the covered shares (including shares underlying stock options), which
at March 31, 2002 was approximately $40.9 million, is calculated as the sum of
the following:

     (a)  the product of (x) the difference between the net asset value per
          share and Pure's common stock price (but only if the net asset value
          per share is higher), times (y) the total of the number of all covered
          officers' covered shares that were actually outstanding at March 31,
          2002; plus
     (b)  the product of (x) the difference between the higher of the net asset
          value per share or Pure's common stock price and the exercise price of
          all covered officers' stock options with an exercise price that is
          less than the higher of net asset value per share or Pure's common
          stock price, times (y) the number of shares underlying these stock
          options.

     In 2002, 2001 and 2000, Pure recorded approximately $8.1 million, $915,000
and $14.8 million, respectively, in compensation expense related to these
compensation arrangements. The total deferred compensation periodically
determined will be amortized as compensation expense over a three-year period
for common stock held at May 26, 2000 (date of the Titan merger), and the
vesting period of each of the applicable stock option agreements. At March 31,
2002 the deferred compensation reflected in the consolidated balance sheet of
$17.1 million is computed by taking the gross deferred compensation of $40.9
million less the compensation expense recorded in 2002, 2001 and 2000, as noted
above. After May 26, 2003, any changes in gross deferred compensation, except
for stock options not fully vested, for each quarterly determination period will
be charged or credited to compensation expense in each quarterly determination
period.

                                       33

<PAGE>

          This compensation arrangement is being treated as a "variable plan"
under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations including FASB Interpretation No. 44
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25." As a result of this treatment, during the
three months ended March 31, 2002, additional paid-in capital was increased by
$10.8 million.

          At March 31, 2002, Pure recorded as common stock subject to repurchase
$69.2 million based on Pure's historical method of calculating this liability.
Due to interpretational factors and circumstances that could exist at the time
of the exercise of the put right, Pure estimates this put obligation would be
not less than $69.2 million nor more than $80.7 million at March 31, 2002. The
aforementioned interpretations and circumstances relate to the treatment and
application of the proceeds from the exercise of the stock options and to the
number of shares to be considered or utilized as fully-diluted shares.
Additionally, the common stock subject to repurchase could differ due to (a) the
imprecision associated with the engineering of oil and gas reserves and (b) the
multiple valuations of the proved reserves that could be required under the put
right, as discussed above.

          Severance Benefits

          Pursuant to the employment/severance agreements, upon the occurrence
of a termination event for severance benefits, as defined in the applicable
agreement and discussed below, each covered officer is entitled to severance
benefits including the following:

     .    Cash payment equal to one to three times (depending on officer) of the
          sum of (a) the annual base salary and (b) greater of the bonus from
          the preceding year or the average of the bonus from the three previous
          years, with a gross-up payment to offset fully the effect of any
          federal excise tax imposed on the severance payment. The aggregate
          payment potentially payable, at March 31, 2002, under this provision
          is approximately $6.0 million, excluding the effect of any gross-up
          payment, if any.
     .    Immediate vesting of all restricted stock, options and other rights
          granted to the officer.
     .    Action by Pure to prevent automatic termination of the officer's stock
          options as a result of termination.

     A termination event, as defined in the applicable agreements, for purposes
of the severance benefits is any one of the following:

..    Termination of employment of the officer by Pure for any reason other than
     cause.
..    Voluntarily termination of employment by the officer for good reason, with
     good reason including the following:
     .    Material change in the nature and scope of the officer's duties and
          responsibilities from those at May 26, 2000.
     .    Reduction in the officer's status with Pure below their current
          position.
     .    Reduction of the officer's base salary below the base salary
          immediately prior to May 26, 2000, except for proportionate,
          officer-wide reductions.
     .    Material diminution in the officer's eligibility to participate in the
          benefit and incentive plans of Pure provided to the officer
          immediately prior to May 26, 2000.
     .    Relocation of the officer outside the state of Texas or required
          travel in excess of the greater of (a) 90 days per year or (b) the
          level of travel of the officer the year immediately prior to May 26,
          2000.
..    Change of control of Pure and failure to reach agreement on employment
     terms following the change of control, which terms are acceptable to the
     officer.
..    Change of control of Unocal and failure to reach agreement on employment
     terms following the change of control, which terms are acceptable to the
     officer.
..    Acquisition by Union Oil and its affiliates of beneficial ownership of 85%
     or more of Pure's voting securities.

Critical Accounting Policies and Practices

          Successful Efforts

          Pure uses the successful efforts method of accounting for its oil and
gas producing activities, which is highly dependent on estimates of its oil and
gas reserves which are inherently imprecise. Costs to acquire mineral interests
in oil and gas properties, to drill and equip exploratory wells that result in
proved reserves, and to drill and equip development wells are capitalized. Costs
to drill exploratory wells that do not result in proved reserves and

                                       34

<PAGE>

geological and geophysical costs are expensed. Costs of significant nonproducing
properties, wells in the process of being drilled and significant development
projects are excluded from depletion until such time as the related project is
developed and proved reserves are established or impairment is determined.

          Provision for depletion of oil and gas properties, under the
successful efforts method, is calculated using the unit-of-production method
(which utilizes proved reserves, which are based on the subjective process of
petroleum engineering) on the basis of an aggregation of properties with a
common geologic structural feature or stratigraphic condition, typically a field
or reservoir.

          Impairment of Long-Lived Assets

          Pure, in accordance with SFAS No. 144 as of January 1, 2002 and SFAS
No. 121 for the periods prior to January 1, 2002, estimated its expected future
cash flows of its oil and gas properties by amortization unit and compared the
amounts determined to the carrying amount of its oil and gas properties less the
accrued abandonment and restoration obligations to determine if the carrying
amounts were recoverable. For those oil and gas properties for which the
carrying amount less the accrued abandonment and restoration obligations
exceeded the estimated future net cash flows, an impairment was determined to
exist; therefore, Pure adjusted the carrying amount of those oil and gas
properties to their estimated fair value as determined by discounting their
expected future net cash flows at a discount rate commensurate with the risks
involved in the industry. Pure had no impairments in 2002 and 2001.

          Estimated future cash flows for purposes of determining impairment of
oil and gas properties are determined using the following assumptions:

          .    Reserve economics are adjusted for known changes such as
               extensions and discoveries, acquisitions and dispositions of
               proved properties and changes in production rates and projected
               decline characteristics. Reserves are based on petroleum
               engineering, which is a subjective process of estimating
               underground accumulations of oil and gas that cannot be measured
               in an exact manner. If Pure's reserve estimates had been lower
               than those estimated by Pure's independent petroleum engineers
               and those prepared by Pure's petroleum engineers, which is a
               possibility if other petroleum engineers were utilized due to the
               inexactness of the engineering process, Pure could have incurred
               an impairment in 2002. Pure's management believes its reserve
               estimates are reasonable.
          .    Cash flows from proved oil and gas properties and appropriate
               risk-adjusted probable and possible reserves are considered in
               the analysis.
          .    The prices used for determining cash flows are determined based
               on the near-term (a period of one to four years, depending on
               management's current views of future market conditions) NYMEX
               futures index adjusted for property specific qualitative and
               location differentials. The latest futures price in the near-term
               price outlook is then held constant for the remaining life of the
               properties. Prices estimated for future periods may be above or
               below current pricing levels. Assuming use of another party's
               price outlook, it is possible that Pure could have incurred an
               impairment in 2002; however, Pure's management believes its price
               outlook assumptions were reasonable at the time and at March 31,
               2002.

          If commodity prices deteriorate from management's view at March 31,
2002, it is possible that Pure could incur an impairment during the remainder of
2002.

          Put Right

          The put right is accounted for as a "variable plan" under Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and
related interpretations including FASB Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation an interpretation of APB
Opinion No. 25." The put right uses the valuation of oil and gas reserves, which
as previously discussed is a subjective process. The amounts associated with the
put right have the potential to have a significant impact on Pure's consolidated
financial statements from period to period, as previously discussed.

                                       35

<PAGE>

Operating Data

          The following sets forth Pure's historical operating data (a):

<TABLE>
<CAPTION>
                                                               Three months ended
                                                                    March 31,
                                                               -------------------
                                                                 2002       2001
                                                               --------   --------
<S>                                                            <C>        <C>

Production:
    Oil and condensate (MBbls) .............................      2,009      1,770
    Natural gas (MMcf) .....................................     21,936     14,598
    Total (MBOE) ...........................................      5,665      4,203

Average daily production:
    Oil and condensate (Bbls) ..............................     22,322     19,667
    Natural gas (Mcf) ......................................    243,733    162,200
    Total (BOE) ............................................     62,944     46,700

Average sales price per unit (excluding effects of hedging):
    Oil and condensate (per Bbl) ...........................   $  19.83   $  27.39
    Natural gas (per Mcf) ..................................   $   2.02   $   5.84
    Total (per BOE) ........................................   $  14.84   $  31.82

Average sales price per unit (including effects of hedging):
    Oil and condensate (per Bbl) ...........................   $  20.13   $  27.00
    Natural gas (per Mcf) ..................................   $   2.37   $   5.27
    Total (per BOE) ........................................   $  16.31   $  29.66

Expenses per BOE:
    Production costs, excluding production and other taxes..   $   3.65   $   3.74
    Production and other taxes .............................   $   1.45   $   2.20
    General and administrative .............................   $   1.08   $   1.47
    Depletion, depreciation and amortization ...............   $   6.80   $   5.71
</TABLE>

----------
(a) The operating data does not include the effects of the operating results for
the assets presented as discontinued operations as discussed in Note 12 of Notes
to Consolidated Financial Statements. The production from the properties
associated with the discontinued operations, not included in the table, were 700
and 670 BOE per day in 2002 and 2001, respectively.

Results of Operations

          Pure closed the International Paper transaction in January 2001 and
the results of operations from these assets have been included in Pure's since
February 1, 2001. Pure completed the Hallwood merger in May 2001. The
transaction was accounted for as a purchase of Hallwood. Accordingly, the
results of operations since May 1, 2001 for Hallwood have been included in
Pure's results of operations.

          Three-months ended March 31, 2002 as compared to 2001

          Pure's revenues from the sale of oil and natural gas were $38.2
million and $49.2 million for 2002 and $47.8 million and $76.9 million for 2001,
respectively. Including the effects of hedging, compared with 2001, Pure's 2002
average oil sales prices decreased by $6.87 per Bbl, or 25%, while average gas
sales prices decreased by $2.90 per Mcf, or 55%. The increase in production of
1,462 MBOE in 2002 is primarily the result of the International Paper
transaction, Hallwood merger and the success of Pure's capital program, offset
by normal

                                       36

<PAGE>

production declines. The International Paper transaction and Hallwood properties
contributed approximately 1,247 MBOE of production in 2002.

          Other operating revenues are primarily the result of Hallwood's
monetization of its Section 29 credits, prior to Pure's acquisition of Hallwood.
Pure will continue to receive this revenue through December 2002 when the
Section 29 credits are currently set to expire.

          Pure's oil and gas production expenses, excluding production and other
taxes, were $20.7 million ($3.65 per BOE) and $15.7 million ($3.74 per BOE) for
2002 and 2001, respectively. Production expenses increased $5.0 million, which
is the result of (a) production costs associated with the International Paper
transaction properties of $1.3 million and Hallwood merger properties of $2.6
million and (b) significant increases in the costs of services and products
between periods.

          Production and other taxes were $8.2 million ($1.45 per BOE) and $9.2
million ($2.20 per BOE) for 2002 and 2001, respectively. The decrease in
production and other taxes is primarily attributable to the decrease in oil and
gas revenues, offset by the associated additional revenues from the assets in
the International Paper transaction and the Hallwood merger in 2002.

          General and administrative ("G&A") expenses were $6.1 million ($1.08
per BOE) and $6.2 million ($1.47 per BOE) for 2002 and 2001, respectively. G&A
costs between periods were comparable in absolute terms. After reimbursing IP
for two months in 2001, Pure's actual G&A costs related to the IP assets was
less in 2002; however in 2002 Pure incurred G&A costs related to the Hallwood
business, which was acquired after the first quarter of 2001. The decrease in
the per unit amount of G&A costs relates to the increased production, primarily
from the IP transaction and Hallwood merger.

          Depletion, depreciation, and amortization expense ("DD&A") was $38.5
million ($6.80 per BOE) and $24.0 million ($5.71 per BOE) for 2002 and 2001,
respectively. DD&A increased in absolute amounts due primarily to the inclusion
of the properties from the International Paper transaction, the Hallwood merger
and Pure's capital program for 2001. The increase in the per unit amount is
primarily attributable to (a) the per unit acquisition costs from the
International Paper transaction and Hallwood merger and (b) the downward
revision, between periods, in proved reserves as a result of a decrease in the
underlying oil and gas prices.

          Pure's exploration and abandonment expense was $8.1 million and $3.3
million for 2002 and 2001, respectively. Increase in exploration expenses is
primarily related to (a) an increase in geological and geophysical staff and
related costs as a result of the International Paper transaction and Hallwood
merger, (b) exploratory dry hole costs and (c) seismic. The significant increase
in exploratory dry hole costs is related to the increase in the exploratory
capital expended in 2002 and a lower success rate in 2002 as compared to 2001.

          In 2002 and 2001, Pure had interest expense due to (a) Pure's
significant capital expenditure program in 2001, (b) the International Paper
transaction that closed in January 2001 and (c) the assumption of the Hallwood
debt and the cash tender offer in the Hallwood merger in May 2001. In June 2001,
Pure issued $350 million of 7.125% fixed rate senior notes.

          In 2002 and 2001, other income (expense) includes ($1.2 million) and
$1.2 million of gain (loss) attributable to the ineffective portion of the cash
flow hedges and the change in fair value of certain derivatives not qualifying
as hedges under SFAS No. 133, respectively.

          Income tax expense (benefit) was ($2.8 million) and $17.8 million for
2002 and 2001, respectively. The effective income tax rates for 2002 and 2001
was approximately 26% and 35%, respectively. The lower effective tax rate is
primarily due to the increase in the Section 29 credits Pure acquired, as
discussed above, and based on Pure's current expectations for 2002.

          In the first quarter of 2002, Pure sold properties located in the
Permian Basin region for approximately $23 million, subject to adjustments,
which resulted in a gain of approximately $617,000. As a result of selling these
properties, Pure was required to reflect this disposition of assets as
discontinued operations under the provisions of SFAS No. 144. In 2002 and 2001,
the results of operations, before income taxes, from these assets was
approximately $279,000 and $823,000, respectively.

                                       37

<PAGE>

Liquidity and Capital Resources

          Pure's primary capital resources are net cash flows provided by
operating activities and the availability under its revolving credit facilities,
of which approximately $296 million was available at March 31, 2002. Unlike many
energy related companies, Pure's revolving credit facilities do not require Pure
to undergo borrowing base redeterminations, which could result in reduced credit
availability. In June 2001, Pure completed the issuance of 7.125% senior notes
due in 2011, the proceeds from which were used to pay off the interim financing
for the Hallwood merger and reduce existing borrowings under Pure's revolving
credit facilities. Pure requires capital primarily for its exploration,
development and acquisition of oil and gas properties, repayment of indebtedness
and general working capital needs. When appropriate, Pure would consider use of
debt and equity financing, non-recourse transactions and asset sales.

Net Cash Provided by Operating Activities

          Cash flow from operating activities for Pure was $58.5 million for
2002 compared to $77.7 million for 2001. The decrease in net cash provided by
operating activities was primarily due to decreased commodity prices between
comparable quarters, offset by (a) Pure's significant capital expenditure
program in 2001, (b) the Hallwood merger and (c) the International Paper
transaction. Commodity prices are highly volatile and Pure's cash flow can vary
dramatically from period to period. A substantial period of low commodity prices
could have a substantial negative impact on Pure's cash flow.

Capital Expenditures

          For 2002, Pure's initial drilling and related capital budget was
approximately $225 million. The initial budget was comprised of approximately
(a) $66 million in development projects, (b) $49 million in exploration
projects, (c) $84 million in probable/possible projects, (d) $24 million to
acquire additional acreage and seismic data and (e) $2 million in other
corporate items. As noted in the fourth quarter of 2001, due to declines in
commodity prices, Pure reviewed its 2002 drilling and related capital spending
plan and expected approximately $105 to $150 million to be spent in 2002. At the
present, Pure expects it will spend in the upper end of that range. Pure will
maintain flexibility to accelerate or increase 2002 capital spending depending
on commodity prices. The final determination with respect to the drilling of any
well, including those currently budgeted, will depend on a number of factors,
including (i) the results of exploration efforts and the review and analysis of
the seismic data, (ii) the availability of sufficient capital resources by Pure
and other participants for drilling prospects, (iii) economic and industry
conditions at the time of drilling, including prevailing and anticipated prices
for natural gas and oil and the availability and costs of drilling rigs and
crews, (iv) the financial resources and results of Pure, and (v) the
availability of leases on reasonable terms and permitting for the potential
drilling location. There can be no assurance that the budgeted wells will
encounter, if drilled, recompleted or worked over, reservoirs of commercial
quantities of natural gas or oil.

          While Pure regularly engages in discussions relating to potential
acquisitions of oil and gas properties, Pure has no present agreement,
commitment or understanding with respect to any such acquisition, other than the
acquisition of oil and gas properties and interests in its normal course of
business.

                                       38

<PAGE>

          Pure requires capital primarily for the acquisition, exploration and
development of oil and gas properties as well as for general working capital
needs. The following table sets forth the costs incurred by Pure in its
acquisition, exploration and development activities.

                               Three months ended March 31,
                               ----------------------------
                                      2002      2001
                                    -------   --------
                                      (in thousands)

Property acquisition:
        Proved                      $   221   $268,934
        Unproved                      4,014      7,614
Exploration                          26,293     17,630
Development                          22,821     28,746
                                    -------   --------
        Total costs incurred        $53,349   $322,924
                                    =======   ========

Capital Resources

          Pure's current primary capital resources are net cash flows provided
by operating activities and the availability under the revolving credit
facilities, of which approximately $296 million was available at March 31, 2002.
Pure has significant contractual obligations in the future that will require
capital resources. The following table is a summary of the significant
contractual obligations at March 31, 2002:

<TABLE>
<CAPTION>
                                                        Obligations Due in Period
                                         ------------------------------------------------------
 Contractual Cash Obligations             2002    2003-2004   2005-2006   Thereafter    Total
--------------------------------         ------   ---------   ---------   ----------   --------
                                                            (in thousands)
<S>                                      <C>      <C>          <C>         <C>         <C>
7.125% senior notes                      $   --   $     --     $    --     $350,000    $350,000
5-Year Revolver                              --         --      56,500           --      56,500
3-Year Revolver                              --    157,500          --           --     157,500
Working Capital Revolver                     --         --          --           --          --
Non-cancelable operating leases           1,933      5,041       4,758        1,367      13,099
Non-cancelable subleases                   (155)      (778)       (909)          --      (1,842)
Commodity derivatives                     2,564         --          --           --       2,564
Interest rate derivatives                   370        571          --           --         941
Common stock subject to repurchase (a)                  --          --       69,224      69,224
                                         ------   --------     -------     --------    --------
Total contractual cash obligations       $4,712   $162,334     $60,349     $420,591    $647,986
                                         ======   ========     =======     ========    ========
</TABLE>

----------
(a) The contractual due date of the common stock subject to repurchase is not
determinable at the present.

          Details regarding the significant contractual cash obligations are
discussed below. A change in Pure's credit rating would not accelerate any of
the contractual cash obligations. Pure's ability to obtain additional sources of
financing are dependent on its operating cash flows and the value of its oil and
gas reserves. Commodity prices are extremely volatile and could negatively
impact Pure's ability to obtain additional sources of financing.

                                       39

<PAGE>

          At March 31, 2002, Pure had the following financial commitments:

<TABLE>
<CAPTION>
                                               Commitment Expiration per Periods
                                     -------------------------------------------------------
            Financial Commitments      2002    2003-2004   2005-2006   Thereafter    Total
----------------------------------   -------   ---------   ---------   ----------   --------
                                                  (in thousands)
<S>                                  <C>        <C>         <C>           <C>       <C>
3-Year Revolver                      $    --    $275,000    $     --      $--       $275,000
5-Year Revolver                           --          --     235,000       --        235,000
Working Capital Revolver              10,000          --          --       --         10,000
Performance bonds                     11,393          --          --       --         11,393
Standby letters of credit                 --          --          --       --             --
Pure guarantees                           --          --          --       --             --
                                     -------    --------    --------      ---       --------
Total contractual cash obligations   $21,393    $275,000    $235,000      $--       $531,393
                                     =======    ========    ========      ===       ========
</TABLE>

          At March 31, 2002, of the financial commitments under Pure's 3-Year
Revolver, 5-Year Revolver and Working Capital Revolver, there was $117.5
million, $178.5 million and $10 million of availability. In the normal course of
business, Pure has performance obligations which are supported by surety bonds
and letters of credit. These obligations primarily cover site restoration and
dismantlement or other programs where governmental organizations require such
support.

          At March 31, 2002, the common stock subject to repurchase was
approximately $69.2 million, as reflected in Pure's consolidated balance sheet.
In the quarters since the origination of the employment/severance agreements
containing the put right the amount of the common stock subject to repurchase
has ranged from $69.2 million to $155.5 million. Accordingly, it could require
substantial financial resources, in excess of those at March 31, 2002, of Pure
to fund the put right. If this occurred, this could reduce Pure's capital
resources available to be utilized towards its debt, capital budget and
acquisitions.

Credit Facilities and Senior Notes

          5-Year Revolver

          In September 2000, Pure entered into an unsecured credit agreement for
a $250 million five-year revolving credit facility ("5-Year Revolver") with
JPMorgan Chase Bank (the "Bank") and First Union National Bank. The 5-Year
Revolver has current commitments of $235 million. All amounts outstanding on the
5-Year Revolver are due and payable in full on September 29, 2005. A portion of
the 5-Year Revolver is available for the issuance of up to $50 million of
letters of credit. At March 31, 2002, $56.5 million was outstanding under the
5-Year Revolver.

          At Pure's option, borrowings under the 5-Year Revolver bear interest
at either (a) the "Alternative Base Rate" (i.e. the higher of the Bank's prime
rate, or the federal funds rate plus .50% per annum), or (b) the Eurodollar rate
plus a margin ranging from .80% to .95% per annum for the 5-Year Revolver. These
margins increase as Pure's debt coverage ratio decreases. Participation fees on
letters of credit are due quarterly and range from .925% to 1.075% per annum of
the outstanding amount of letters of credit. Facility fees are due quarterly on
the total of the outstanding commitments under the 5-Year Revolver and range
from .20% to .30% per annum. At March 31, 2002, Pure is paying .80% margin on
its Eurodollar tranches.

          The 5-Year Revolver contains various restrictive covenants and
compliance requirements, which include (a) limiting the incurrence of additional
indebtedness, (b) restrictions as to merger, sale or transfer of assets and
transactions with affiliates without the lenders' consent, (c) limitation on
dividends and distributions, (d) other financial covenants and (e) limitation on
hedging arrangements.

                                       40

<PAGE>

          3-Year Revolver

          In November 2001, Pure entered into an unsecured credit agreement with
JPMorgan Chase, First Union National Bank and BNP Paribas for a $275 million
3-year revolving credit facility ("3-Year Revolver"). All amounts outstanding
under the 3-Year Revolver are due and payable in full on November 20, 2004. A
portion of the 3-Year Revolver is available for the issuance of up to $50
million of letters of credit. At March 31, 2002, $157.5 million was outstanding
under the 3-Year Revolver.

          At Pure's option, borrowings under the 3-Year Revolver bear interest
at either (a) the "Alternate Base Rate" (i.e., higher of the Bank's prime rate,
or the federal funds rate plus .50% per annum) or (b) the Eurodollar rate plus a
margin ranging from .375% to .950% per annum. These margins vary as Pure's debt
rating with S&P and Moody's changes (i.e. improvement in Pure's debt rating
decreases its margins). At March 31, 2002, Pure is paying .750% margin on its
Eurodollar tranches.

          Participation fees on letters of credit are due quarterly and range
from .500% to .750% per annum on the outstanding amount of letters of credit.
Facility fees are due quarterly on the total of the outstanding commitments
under the 3-Year Revolver and range from .125% to .300% per annum. Utilization
fees of .25% are due quarterly on the outstanding principal and letters of
credit for the periods when the lenders' exposure exceeds 33% of the total
commitments.

          The 3-Year Revolver contains various restrictive covenants and
compliance requirements (which are identical to the 5-Year Revolver), which
include (a) limiting the incurrence of additional indebtedness, (b) restrictions
as to merger, sale or transfer of assets and transactions with affiliates
without the lenders' consent, (c) limitation on dividends and distributions, (d)
other financial covenants and (e) limitation on hedging arrangements.

          7.125% Senior Notes

          In June 2001, Pure issued $350 million in unsecured senior notes which
bear interest at 7.125%. The 7.125% senior notes were issued at a discount to
their face value which resulted in the 7.125% senior notes having a yield of
7.232%. The 7.125% senior notes pay interest each June 15 and December 15
beginning in December 2001. The maturity date of the 7.125% senior notes is June
15, 2011. Pure has the right to redeem the 7.125% senior notes at any time for
an amount equal to the principal plus a make-whole premium.

          The 7.125% senior notes are fully and unconditionally guaranteed, on a
joint and several basis, by certain wholly-owned subsidiaries of Pure. Each of
the guarantees is an unsecured obligation of the guarantor and ranks pari passu
with the guarantees provided by and the obligations of such guarantor
subsidiaries under the 5-Year Revolver and 3-Year Revolver and with all existing
and future unsecured indebtedness of such guarantor for borrowed money that is
not, by its terms, expressly subordinated in right of payment to such guarantee.

          The 7.125% senior notes indenture contains covenants, which include
limitations on (a) liens, (b) sale/leaseback transactions and (c) mergers and
consolidations. Pursuant to a registration rights agreement, in November 2001
Pure completed an exchange offer pursuant to which the 7.125% senior notes were
exchanged for a new, registered issue of 7.125% senior notes.

          Credit Rating Agencies

          Pure, as a part of issuing its 7.125% senior notes, received credit
ratings from Fitch, Moody's and Standards & Poor ("S&P"). Pure received, from
the rating agencies, investment grade ratings (Baa3 with Fitch, Baa3 with
Moody's and BBB- with S&P). Pure is subject to regular reviews by the rating
agencies. In April 2002, Moody's announced it was placing Pure's long-term debt
rating "under review for possible downgrade," while our ratings with Fitch and
S&P were recently reaffirmed. If Pure were to be downgraded by any of the rating
agencies it could have an impact on Pure's (a) ability to get additional
financing in the future and (b) interest rates and fees it would be able to
obtain on new financing. As noted above, under Pure's 3-Year Revolver the
interest rate and fees are adjusted upon changes to Pure's credit rating, both
positively and negatively by two or more rating agencies. At the present, Pure
does not have any obligations whose payment would be accelerated in the event of
a downgrade of Pure's credit rating.

                                       41

<PAGE>

Liquidity and Working Capital

          At March 31, 2002, Pure had $3.8 million of cash and cash equivalents.
Pure's ratio of current assets to current liabilities was 0.56 at March 31,
2002. Pure maintains low cash levels for cash management purposes. Pure, at
March 31, 2002, had availability under its revolving credit facilities to fund
any working capital deficit.

          Working Capital Revolver

          In October 2000, for purposes of maximizing its daily cash management
activity, Pure entered into an unsecured $10 million working capital credit
facility (the "Working Capital Revolver") with a bank. Individual borrowings may
be made for up to a three week period. The Working Capital Revolver has no
maturity date and is cancelable at anytime by the bank. The interest rate of
each loan under the Working Capital Revolver is determined by agreement between
Pure and the bank. The rate shall not exceed the maximum interest rate permitted
under applicable law. Interest rates generally are at the bank's cost of funds
plus 1% per annum. At March 31, 2002, there was no outstanding principal under
the Working Capital Revolver. Pure has the ability and intent to finance the
principal outstanding under the Working Capital Revolver utilizing Pure's
long-term revolving credit facilities.

Other Matters

          Stock Options and Compensation Expense

          Pure has issued options in 2002, 2001 and 2000 to officers and
non-officers to purchase 108,467, 1,176,716 and 5,166,560 shares, respectively,
of Pure common stock. Upon the formation of Pure certain options awarded the
officers and non-officers had an exercise price that was below the Pure stock
price on the date of grant. Accordingly, Pure recorded deferred compensation of
$2.9 million related to non-officer options and will expense the amount over a
four-year period. In 2002, 2001 and 2000, Pure expensed approximately $156,000,
$779,000 and $600,000 , respectively, related to these options. The options
related to officers are subject to the put right discussed in the following
paragraph.

          As discussed in Note 6 of the Notes to Consolidated Financial
Statements, officers of Pure have the right to require Pure to purchase shares
of Pure common stock (or equivalently converted shares) directly held by the
officer on December 1, 1999, of which there were 2,796,107 shares held subject
to the put right at March 31, 2002 or are obtained by the exercise of any stock
options held or granted in the future, of which there were 4,130,854 stock
options subject to the put right, by the officer, at a calculated "net asset
value" per share. The circumstances under which certain officers may exercise
the put right are discussed in Note 6 of the Notes to Consolidated Financial
Statements. As a result of the put right, the consolidated balance sheet at
March 31, 2002 reflects approximately $69.2 million as common stock subject to
repurchase and Pure recorded approximately $40.9 million in deferred
compensation as of March 31, 2002, of which Pure recognized deferred
compensation expense of approximately $8.1 million, $915,000 and $14.8 million
in 2002, 2001 and 2000, respectively. This arrangement is being treated as a
variable plan under Accounting Principles Board Opinion No. 25 "Accounting for
Stock Based Compensation," and related interpretations including FASB
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation; an Interpretation of APB Opinion No. 25." Consequently, the total
compensation for both shares held and shares subject to option will be measured
at the end of each quarter as the calculated amount of net asset value and the
market price of Pure shares change. The total amount determined will be
amortized as compensation expense over a three-year period for common stock and
the vesting period of the stock options with any changes after three years for
common stock and the vesting period of the stock options being expensed in the
period of determination.

                                       42

<PAGE>

          Disclosure about Market Risk

          Pure may use swap agreements and other financial instruments in an
attempt to reduce the risk of fluctuating oil and gas prices and interest rates.
Settlement of gains or losses on the hedging transactions are generally based on
the difference between the contract price and a formula using NYMEX or other
major indices related prices and is reported as a component of oil and gas
revenues as the associated production occurs. At March 31, 2002, Pure had
hedging transactions with respect to approximately 19,180,000 MMBtu of its
future 2002 estimated natural gas production and 130,000 barrels of its future
2002 estimated crude oil production, respectively. For additional information,
see Note 8 of Notes to Consolidated Financial Statements and Item 7A -
Quantitative and Qualitative Disclosures about Market Risk.

          At March 31, 2002, Pure had $37.5 million in notional principal of
fixed for floating interest rate swaps, which were acquired as part of the
Hallwood merger. Pure pays a fixed rate of 5.23% and receives a LIBOR floating
rate. The derivative contracts mature in February 2004.

          Environmental and Other Laws and Regulations

          Pure's business is subject to certain federal, state and local laws
and regulations relating to the exploration for the development, production and
transportation of oil and gas, as well as environmental and safety matters. Many
of these laws and regulations have become more stringent in recent years, often
imposing greater liability on a larger number of potentially responsible
parties. Although Pure believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation, and Pure is
unable to predict the ultimate cost of compliance with these requirements or
their effect on its operations. Pure has no material commitment for capital
expenditures to comply with existing environmental requirements.

          Nevertheless, changes in existing environmental laws or in
interpretations thereof could have a significant adverse impact on the operating
costs of Pure, as well as the oil and gas industry in general.

          Recently Adopted and Issued Accounting Pronouncements

          In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations initiated after
June 30, 2001, be accounted for under the purchase method and SFAS No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. There is no impact to Pure's financial statements as we
have not entered into any business combinations subsequent to June 30, 2001 that
required the recording of goodwill and other intangible assets.

          In October 2001, FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" which establishes requirements for accounting for
removal-type costs associated with asset retirements. The standard is effective
for years beginning after June 15, 2002, with earlier application encouraged. As
of March 31, 2002, Pure is assessing the impact on its financial statements.

          In October 2001, FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 superseded SFAS No. 121 and the accounting and reporting provisions
of APB Opinion No. 30. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001. Pure adopted the SFAS No. 144 on January 1, 2002. Pure
believes that the impact from SFAS No. 144 on Pure's financial position and
results of operations should not be significantly different from that of SFAS
No. 121, except as to the reporting of asset disposals related to discontinued
operations.

                                       43

<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          The following quantitative and qualitative information is provided
about financial instruments to which Pure is a party as of March 31, 2002, and
from which Pure may incur future earnings gains or losses from changes in market
interest rates and commodity prices.

Quantitative Disclosures

          Commodity Price Risk:

          The following table provides information about Pure's derivative
financial instruments that are sensitive to changes in natural gas and crude oil
commodity prices. See Note 8 of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" for specific information regarding
the terms of Pure's commodity derivative financial instruments that are
sensitive to natural gas and crude oil commodity prices.

<TABLE>
<CAPTION>
                                                            2002       Fair Value
                                                        -----------   -----------
<S>                                                     <C>           <C>
Natural Gas Hedge Derivatives(a):

Collar option contracts:
Notional volumes(MMBtu)                                  19,180,000   $(2,731,469)

Weighted average short put strike price per MMBtu(b)    $     2.938
Weighted average long call strike price per MMBtu(b)    $     3.519

Basis differential contracts(c):
Notional volumes(MMBtu)                                     270,000   $   248,060

Weighted average strike price per MMBtu                 $     0.210

Crude Oil Hedge Derivatives(a):

Collar option contracts:
Notional Volume(Bbls)                                       130,000   $   (80,273)
Weighted average short put strike price per Bbl(b)      $    24.110
Weighted average long call strike price per Bbl(b)      $    26.730
</TABLE>

----------
(a)  See Note 8 of Notes to Consolidated Financial Statements included in "Item
     1. Financial Statements" for additional information related to hedging
     activities.
(b)  The strike prices are based on prices of either a NYMEX Henry hub or
     Permian Basin hub.
(c)  The basis differential relates to the spread between the NYMEX price and
     the Waha West Texas price.

          Enron Bankruptcy

          In the fourth quarter of 2001, Pure and many other parties were
affected by the bankruptcy of Enron Corp. and subsidiaries. Pure had various
natural gas and crude oil swaps with certain Enron subsidiaries. As a result of
the Enron bankruptcy, Pure terminated its derivative contracts with Enron. At
the termination date of the contracts, Enron's subsidiaries owed Pure a net
receivable of approximately $2.0 million. Due to the uncertainty of collecting
this amount, Pure wrote-off the majority of the amount due from Enron. Enron's
bankruptcy has caused Pure and many other parties to re-examine their exposure
to credit risk and take additional measures to protect themselves in the future.

                                       44

<PAGE>

Interest Rate Risk:

          The following table provides information about Pure's financial
instruments that are sensitive to interest rates. The debt obligations are
presented in the table at their contractual maturity dates together with the
weighted average interest rates expected to be paid on the debt. The weighted
average interest rates for the variable debt represents the weighted average
interest paid and/or accrued in December 2001. See Note 3 of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
specific information regarding the terms of Pure's debt obligations that are
sensitive to interest rates.

<TABLE>
<CAPTION>
                                    2004        2005      2011      Total     Fair Value
                                  ---------   -------   --------   --------   ----------
                                         (in thousands, except interest rates)
<S>                                <C>        <C>       <C>        <C>         <C>
Debt(a):

Variable rate debt:

    Five-Year Revolver(b)          $     --   $56,500   $     --   $ 56,500    $ 56,500
       Average interest rate             --%     2.75%        --%

    Three-Year Revolver(b)         $157,500   $    --   $     --   $157,500    $157,500
       Average interest rate           2.85%       --%        --%

    Working Capital Revolver(b)    $     --   $    --   $     --   $     --    $     --
       Average interest rate             --%     0.00%        --%

Fixed rate debt:

    Senior Notes                   $     --   $    --   $350,000   $350,000    $335,682
       Interest rate                     --%       --%     7.125%
</TABLE>

----------

(a)  See Note 3 of Notes to Consolidated Financial Statements included in "Item
     1. Financial Statements" for additional information related to debt.
(b)  Lenders are The JPMorgan Chase Bank, First Union National Bank and BNP
     Paribas among others and all borrowings are unsecured.

     Interest Rate Swaps:

          At March 31, 2002, Pure had an interest rate swap, acquired in the
Hallwood merger, as set forth below:

            Period                   Notional Amount   Fixed Price
----------------------------------   ---------------   -----------
               2002                    $37,500,000        5.23%
               2003                    $37,500,000        5.23%
Two months ended February 29, 2004     $37,500,000        5.23%

          Pure pays the fixed rate and receives a LIBOR floating rate. At March
31, 2002, the fair value of the interest rate swap was a liability of
approximately $941,000.

                                       45

<PAGE>

Qualitative Disclosures

                       Derivatives and Hedging Objectives

          Pure may enter into derivative contracts to protect against commodity
price risk and interest rate risk when in management's opinion it may be
appropriate to support its future cash flows in the following situations:

          Commodity Price Risk:

          .    Protect Pure's cash flow relative to its near-term capital
               budget,
          .    Protect the economics of acquisitions,
          .    Protect the economics of price sensitive developmental projects,
          .    Protect Pure's ability to meet debt service requirements, and
          .    Protect against potential significant negative price declines.

          Interest Rate Risk:

          .    Protect cash flows against potential significant interest rate
               increases and
          .    To fix interest rate cash outflows to allow Pure to protect the
               availability of cash flows for its capital budget.

                       Derivatives and Hedging Strategies

          To meet the above objectives, management may utilize the following
types of derivative instruments to manage cash flows resulting from commodity
price risk and interest rate risk.

          Commodity Price Risk:

          .    Commodity price collars,
          .    Commodity price swaps,
          .    Futures contracts (e.g., puts and calls),
          .    Physical delivery contracts,
          .    Energy swaps, and
          .    Commodity basis differential swaps.

          Interest Rate Risk:

          .    Interest rate swaps,
          .    Interest rate collars,
          .    Purchased options, and
          .    Interest rate caps.

          The derivative contracts Pure may enter into are intended to be an
economic hedge of a commodity price risk or interest rate risk. However, Pure
may unwind a derivative contract at anytime for any reason at management's
discretion.

          The above objectives and strategies have been approved by Pure's board
of directors and any significant changes to the objectives and strategies must
be ratified by the board of directors. Management and the executive committee
are authorized to hedge up to 25% and 75%, respectively, of Pure's future
equivalent oil and gas production utilizing these objectives and strategies. To
exceed the 25% level, management must obtain approval of the executive committee
up to the 75% level. The executive committee must obtain approval of the board
of directors to exceed the 75% level. The chief executive officer is required to
approve all derivative contracts prior to their execution.

          Pure historically had held no derivative instruments related to
interest rate exposure risks, as Union Oil had historically retained all the
debt and related interest charges.

          Pure is a producer of various hydrocarbon commodities such as crude
oil and condensate, natural gas and associated petroleum-based products and is
subject to the associated price risks. Prior to the Titan merger, Union Oil (not
Pure) had historically mitigated its exposure to fluctuations in crude oil and
natural gas prices through an affiliate of Union Oil. Historically, hedging and
trading gains and losses incurred by Union Oil were not allocated to Pure and
were not

                                       46

<PAGE>

reflected in the Permian Basin business units presented results. Therefore,
historically, Pure's associated price risks were not mitigated.

          As of March 31, 2002, Pure's primary risk exposures associated with
financial instruments to which it is a party include crude oil and natural gas
price volatility and interest rate volatility. Pure's primary risk exposures
associated with financial instruments have not changed significantly since
December 31, 2001.

                                       47

<PAGE>

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings

          Hallwood Petroleum, Inc. has been named as a defendant in a suit
styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al, which was
filed May 17, 2001 in the 15th Judicial District Court, Lafayette Parish,
Louisiana. Lamson Petroleum Corporation seeks proceeds from the sale of gas and
condensate produced and sold from units on 200 acres of land in the parish and a
declaratory judgement recognizing its interest in production from the units.
Hallwood Petroleum, Inc. and the other working interest owners in the leases
involved offered to settle the matter for $250,000 (approximately 50% of this
amount would be Pure's share). The settlement offer was not an admission of
liability but an attempt to limit the parties' future costs to vigorously defend
the matter. Lamson rejected this offer and countered with an offer to settle the
matter for $25 million. All parties rejected this offer.

          We are unable at this time to assess the likelihood of an unfavorable
outcome. We strongly believe the suit is without merit and shall vigorously
defend against it. In our opinion, the ultimate disposition of this lawsuit in
the event of an unfavorable outcome, if the matter does go to trial, should not
have a material adverse effect on Pure's financial position or liquidity, but
could adversely impact results of operations in a given reporting period.

Item 2. Changes in Securities and Use of Proceeds

          None.

Item 4. Submission of Matters to a Vote of Security Holders

          None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

          10.1 Letter Agreement dated April 23, 2002 related to the Business
               Opportunities Agreement dated as of December 13, 1999, by and
               among Union Oil Company of California, Pure Resources, Inc., TRH,
               Inc., and Titan Exploration, Inc.

(b) Reports Submitted on Form 8-K:

          None.

                                       48

<PAGE>

                                   SIGNATURES
                                   ----------

          Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                   PURE RESOURCES, INC.


                                   By: /s /Jack Hightower
                                       -----------------------------------------
                                       Jack Hightower
                                       President and Chief Executive Officer


                                   By: /s/ William K. White
                                       -----------------------------------------
                                       William K. White
                                       Vice President - Finance and
                                          Chief Financial Officer

Date: May 14, 2002

                                       49